Investor Advocacy Clinic Comments on FINRA Proposed Rule Change 2014-005

study2By Scott Evans, Spring 2014 Student Intern

At the Investor Advocacy Clinic, our goal is to protect investors, particularly those with smaller claims and limited assets. While that sometimes involves participation in FINRA arbitration proceedings, we also further that goal by monitoring proposed rule changes that FINRA is considering. When FINRA proposes to modify its rules, those proposals are open to the public for comments. The comments are taken into consideration when deciding whether to accept, reject, or modify the proposal. As such, the Clinic views these opportunities as a meaningful way to protect the interests of investors.

The Proposal: SR-FINRA-2014-005

In this proposal, SR-FINRA-2014-005, FINRA suggests expanding the scope of arbitrator referrals. As the rules currently stand, when arbitrators discover something during a hearing that leads them to believe ongoing fraudulent activity is occurring (i.e. a Ponzi scheme is still in progress), they may refer that belief up the ladder once the hearing concludes so the enforcement divisions of FINRA can potentially take further action. With this proposal, FINRA seeks to expand the rule so that such referrals can take place while a hearing is ongoing and arbitrators need not wait until the hearing concludes. However, if an arbitrator were to act pursuant to the proposed change, the party that is subject of the referral could seek to have that arbitrator recuse himself from further proceedings.

The Clinic’s Comment

On March 11, 2014, the Investor Advocacy Clinic submitted its comment on the proposal. While lauding FINRA’s efforts to protect investors, the Clinic was concerned with the recusal provisions of the proposed rule. Particularly troubling to the Clinic was the situation in which an investor participating in arbitration would be subjected to increased costs and delays that a recusal request could generate.

The Clinic will continue to monitor the situation going forward and will continue to submit other comments when the interest of investors are potentially affected.