This article was originally posted on TheStreet Foundation Web site on June 18, 2014

NEW YORK (TheStreet) -- The notorious penny-stock swindler Meyer Blinder was perched at his desk when I arrived to interview him at his Englewood, Colo., brokerage firm, Blinder, Robinson & Co., on a chilly January afternoon in 1986. Before any opportunity for handshakes or other opening courtesies, he embarked on a rant.

"It's nothing more than a vendetta," he began, launching into a diatribe about the regulator -- the Securities and Exchange Commission --  he'd been swatting out of his way as if it were some pesky mid-summer gnat. "The SEC has a vendetta."

He'd been sued by the SEC and censured by state regulators nationwide, inspiring news coverage that suggested a better name for his firm might be "Blind 'Em and Rob 'Em." Blinder told me he didn't deserve such shoddy treatment from the public servants in charge of regulating the nation's capital markets.

I am reminded of Blinder's long-running battle with securities regulators because nearly three decades later, Wall Street's self-regulatory organization is pushing a controversial proposal aimed at nipping operations like Blinder's in the bud. And when you consider how much damage guys like Blinder can do even as regulators are in hot pursuit, you've got to wonder whether the proposed reform would make any difference.

The Financial Industry Regulatory Authority is fighting to get a rule passed that would allow its arbitrators to rat on bad guys if they run across evidence during a hearing that suggests the investing public is at grave risk.

Think Bernie Madoff, who's doing time in a federal prison in Butner, N.C.; or Allen Stanford, who's an inmate at the federal penitentiary in Sumterville, Fla.; or the late Blinder, who wound up serving 40 months in a federal prison for six counts of racketeering, fraud and money laundering.

Finra doesn't want to squander so much as a nanosecond before sending in the troops to swoop in on egregious violators like these, and it's hoping that a tweak to the arbitration rules could accelerate the potential big bust.

As Finra put it in a letter to the SEC on May 19, the proposal would help it "detect serious, ongoing or imminent threats to investors at an earlier stage than would otherwise occur." Finra spokeswoman Michelle Ong said, "It is not appropriate for us to comment on a proposal currently under consideration" by the SEC.

Although the Finra proposal has been kicking around for four years, the SEC said on May 20 that it wanted to hear comments from "interested persons" with respect to possible problems with the rule. More on that in a bit.

In case you've forgotten amid the euphoria of a record-setting stock market, Finra and its overseer, the SEC, were rendered buffoons after missing the crimes of Madoff and Stanford. Redemption might come if smarter policies were to lead to bagging the bad guys in the future.

Securities arbitrators made decisions on 499 cases last year, and thus have a ringside seat to hearing allegations and evidence against the brokers and firms accused of fleecing the investing public. But the way the rules stand now, arbitrators have to wait until the case is over to send up a flare about the most dangerous operators. Anonymous tips are not a viable option for arbitrators: They take an oath to keep case information confidential.

So Finra would like to amend those rules and allow arbitrators to contact the Director of Arbitration -- who could decide if a case should be referred to Enforcement -- even as the dispute is still being heard. The authority said in its May 19 letter that it would be "extremely rare" that arbitrators would come across cases that required mid-case referral.  

What's not to like?  George Friedman, who retired as director of Finra arbitration in 2013, said in an interview that Finra's proposal is a constructive one that would only be used "when it's 'call in the swat team' time."

Mostly, though, the idea has been met with derision, and underscores some of the problems with Wall Street's method of dealing with investor disputes.

"I understand the optics of wanting to have a rule like this," said Brian N. Smiley, an Atlanta lawyer who represents investors in cases against brokers. "But optics notwithstanding, I think it will just create chaos for investors in arbitration."

The expected chaos would result when accused brokerage firms cry foul that an arbitrator who has referred a case is by definition an arbitrator who is biased. It's one thing to sound the alarms to the enforcement division after all the evidence has been heard, said Jeffrey Pederson, a Greenwood Village, Colo., lawyer who represents investors. But if a case is still ongoing, it would be no surprise to see a broker or brokerage firm move to recuse an arbitrator who had already concluded that other investors might be at risk, Pederson said.

Recusals would mean new hearing fees and legal costs to the investor who'd brought the case, because Finra's arbitration division charges parties for each hearing session, and recusal requests would rack up more hearing hours.

In its request for comments in May, the SEC asked whether Finra should amend the proposal "to preclude the Director, or anyone else, from notifying the parties of a referral." That presumably would ward off those recusal requests, as well as possible motions to vacate -- another potential expense for the investor in the middle of having his or her claim considered.

Finra already gets information from its arbitration arm. Since 2004, a section of its Office of Fraud Detection and Market Intelligence, the Central Review Group, has looked over investor claims as they arrive in the arbitration department, checking for situations that should be sent to enforcement.

But Finra now says it's looking for more than the allegations that an investor puts in a statement of claim. It wants to know if evidence or testimony at a hearing sheds light on dangerous practices that weren't included in the initial claim.

If not for Wall Street's insistence that its customers take disputes to Finra arbitration -- not the public courts -- all of this would be moot, of course. Court documents are public anyway, so enforcement attorneys wouldn't need anyone to forward complaints. And trials are open to anyone willing to show up -- SEC lawyers, Finra investigators, news reporters and your Aunt Millie. So shocking revelations that expose the new Bernie Madoff wouldn't be made behind closed doors in front of arbitrators who've vowed to keep it all confidential.

As always in a system that protects wrongdoers from court, investors can count only on themselves. Fortunately, customers these days have two things that Meyer Blinder's clients didn't: Easy access to news articles about brokers and firms on the Internet, and an accessible, if imperfect, Finra service called BrokerCheck that details regulatory problems and many of the customer complaints brought against brokers.

So do the work yourself. If you think the regulators can protect you in this wacky system where transgressions are adjudicated in private, you're a sitting duck for that "next Bernie Madoff" case Finra's trying so hard to catch.

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