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.