[Federal Register Volume 88, Number 197 (Friday, October 13, 2023)]
[Notices]
[Pages 71051-71063]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-22612]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98703; File No. SR-FINRA-2023-013]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend
the FINRA Codes of Arbitration Procedure and Code of Mediation
Procedure To Revise and Restate the Qualifications for Representatives
in Arbitrations and Mediations
October 6, 2023.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on October 5, 2023, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by FINRA. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA Rule 12208(b) through (d) of the
Code of Arbitration Procedure for Customer Disputes (``Customer
Code''), FINRA Rule 13208(b) through (d) of the Code of Arbitration
Procedure for Industry Disputes (``Industry Code'') and FINRA Rule
14106(b) through (d) of the Code of Mediation Procedure (``Mediation
Code'' and collectively, ``Codes''), to revise and restate the
qualifications for representatives in arbitrations and mediations in
the forum administered by FINRA Dispute Resolution Services (``DRS'');
to disallow compensated representatives who are not attorneys from
representing parties in the DRS forum; to codify that a student
enrolled in a law school participating in a law school clinical program
or its equivalent and practicing under the supervision of an attorney
may represent investors in the DRS forum; and to clarify the
circumstances in which any person, including attorneys, would be
prohibited from representing parties in the DRS forum.
The text of the proposed rule change is available on FINRA's
website at http://www.finra.org, at the principal office of FINRA and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
The Codes currently permit parties to arbitrations and mediations
in the DRS forum to represent themselves, to be represented by an
attorney at law in good standing or to be represented by a non-attorney
representative (``NAR'').\3\ Some NARs receive compensation in
connection with their representation of parties (``compensated NARs'').
Compensated NARs receive monetary or non-monetary compensation in
connection with the representation of parties--including, for example,
advance fees, consulting fees, payments in kind, referral fees or fees
pursuant to a contingent fee arrangement. Other NARs, often friends or
relatives of a party, may assist parties with their cases without
compensation (``uncompensated NARs''). In addition, although not
specifically provided for in
[[Page 71052]]
the Codes, law students typically represent parties pro bono while
practicing under the supervision of an attorney through securities
arbitration clinics (``SACs'').\4\
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\3\ See FINRA Rules 12208, 13208 and 14106.
\4\ SACs are affiliated with law schools and are typically
staffed by second- or third-year law students. SACs provide pro bono
legal representation to individual customers who seek to arbitrate
or mediate claims under $100,000 and who cannot find or afford an
attorney to represent them. Generally, SACs require that potential
clients not exceed specified household income and asset
requirements. Currently, 10 SACs operate in the District of
Columbia, Florida, Illinois, New Jersey, New York and Pennsylvania.
For more information on SACs, see https://www.finra.org/arbitration-mediation/how-find-attorney.
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In response to forum users' concerns regarding the conduct of
compensated NARs,\5\ FINRA has reviewed their representation of parties
in arbitration and mediation in the DRS forum.\6\ FINRA observes that
compensated NARs represent customers in a small percentage of the
customer cases in the DRS forum--one percent--and that only a few
compensated NARs regularly operate in the DRS forum today.\7\
Compensated NARs often possess a background in the securities industry
and primarily represent individuals in arbitration or mediation claims
against broker-dealers and their associated persons.\8\ Less commonly,
they may represent associated persons in expungement claims brought
against broker-dealers. Compensated NARs often associate with companies
(``NAR firms'') that are in the business of bringing these claims and
providing related services, such as evaluations of customer account
activity.
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\5\ The suggestion to study the role of compensated NARs in
arbitration and mediation originated from the FINRA Dispute
Resolution Task Force (``Task Force''). The Task Force was formed to
suggest strategies to enhance the transparency, impartiality and
efficiency of the DRS forum and included representatives from the
industry and the public with a broad range of interests in
securities dispute resolution. See Final Report and Recommendations
of the FINRA Dispute Resolution Task Force, https://www.finra.org/sites/default/files/Final-DR-task-force-report.pdf.
\6\ In Regulatory Notice 17-34 (October 2017) (``Notice''),
FINRA sought responses to questions related to forum users'
experiences with compensated NARs and whether it would be prudent to
further restrict their representation of parties. See infra Item
II.C. (discussing the Notice and summarizing comments).
\7\ See infra Item II.B. (discussing Economic Impact
Assessment).
\8\ See infra note 87 and accompanying text.
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Despite the low number of compensated NARs, FINRA's review
identified several recent allegations of improper conduct by
compensated NARs in connection with their representation of parties in
the DRS forum. In contrast, FINRA has not identified any allegations of
improper conduct by uncompensated NARs or law students. Unlike
compensated NARs, uncompensated NARs (often friends or relatives of a
party) lack a direct pecuniary incentive to engage in misconduct when
seeking new client relationships or bringing claims in the DRS forum.
In addition, unlike uncompensated NARs, law students seeking
educational opportunities to gain legal experience participate in SACs
under the supervision of attorneys and typically represent parties pro
bono. Thus, FINRA's focus at this time is on the representation of
parties in the DRS forum by compensated NARs. For example, the State of
California recently brought a civil enforcement action against several
compensated NARs for engaging in the unauthorized practice of law, in
part in the DRS forum; falsely promising to help customers recover
their past failed investments through, in part, arbitration in the DRS
forum; and charging advance fees in violation of California law.\9\
Another compensated NAR was criminally sentenced in New York for felony
grand larceny, engaging in a scheme to defraud, and falsification of
business records in connection with proceedings that the compensated
NAR initiated in the DRS forum. A different compensated NAR
misrepresented his identity in order to represent parties in DRS
proceedings even though he was not qualified to do so. In addition,
forum users have asserted that compensated NARs cold call investors
with aggressive sales tactics; \10\ pursue frivolous claims; \11\
misrepresent or willfully fail to disclose important facts relating to
their background; \12\ achieve worse outcomes or awards for their
clients or settle cases for lower amounts than attorneys; \13\ and work
in coordination with persons who are suspended or barred from the
securities industry.\14\
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\9\ See Complaint for Injunctive Relief, Civil Penalties and
Other Ancillary Relief, People v. Chambliss Corp., No. 18STCV05586
(Cal. Super. Ct. filed Nov. 19, 2018); see also People v. Chambliss
Corp., No. 18STCV05586, 2020 Cal. Super. LEXIS 72668 (Cal. Super.
Ct. Nov. 12, 2020) (order granting stipulated judgment against
Defendant Casey C. Mielnik, a compensated NAR, for violations of
false advertising, unfair competition law, and telephonic sellers
law); Chambliss Corp., No. 18STCV05586 (Cal. Super. Ct. Nov. 24,
2020) (order regarding Defendant National Advisory Network, Inc. and
granting default judgment against 11 defendants, nine compensated
NARs and two nonlegal corporations, for false advertising, unfair
competition law, telephonic sellers law, and unauthorized practice
of law); Chambliss Corp., No. 18STCV05586 (Cal. Super. Ct. Nov. 24,
2020) (order regarding Defendants Jay R. Jeskie, Eric D. Harris,
Elijah Schnell, Matthew J. Cano, John W. Martynec, Gordon A. Herman
and granting default judgment against 11 defendants, nine
compensated NARs and two nonlegal corporations, for false
advertising, unfair competition law, and telephonic sellers law);
Chambliss Corp., No. 18STCV05586 (Cal. Super. Ct. Jan. 13, 2021)
(order granting motion for summary adjudication against Defendant
Amanda L. Langer, a compensated NAR, for violating unfair
competition law, unauthorized practice of law, and telephonic
sellers law); People v. Chambliss Corp., No. 18STCV05586, 2022 Cal.
Super. LEXIS 86977 (Cal. Super. Ct. Sept. 29, 2022) (judgment
against attorney Peter A. Bumerts for the unauthorized practice of
law, false advertising, unfair competition law, and aiding and
abetting the unauthorized practice of law).
\10\ See infra note 88 and accompanying text.
\11\ See infra note 89 and accompanying text.
\12\ See, e.g., PIABA, infra note 115.
\13\ See David E. Robbins, 1 Sec. Arb. Proc. Manual Sec. 6-2,
Release No. 26 (5th ed. 2022); infra note 90 and accompanying text.
\14\ See infra note 87 and accompanying text.
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FINRA is concerned about these serious allegations and the
potential harm to parties represented by compensated NARs, particularly
to customers. This concern is heightened because parties are
compensating these NARs to represent them in the DRS forum, yet there
is no direct regulation of compensated NAR conduct. Although
compensated NARs may be subject to state laws governing general
business practices,\15\ they are not subject to the specific and
extensive professional qualification requirements, ethical rules,
disciplinary processes and client protections that the states and other
U.S. jurisdictions apply to attorneys who represent parties in the DRS
forum.\16\ FINRA is concerned that compensated NARs' interactions with
customers are not subject to regulation like the state disciplinary
rules on lawyer advertising and solicitation,\17\ and that this also is
[[Page 71053]]
not an area that FINRA regulates. Although they are engaged in the
business of representing parties in the DRS forum, compensated NARs
also are not required to purchase malpractice insurance and their
clients are not protected by statewide client protection funds.\18\ In
contrast, all U.S. jurisdictions require attorneys to finance client
protection funds through association dues, lawyer registration fees or
annual assessments. Because customers of compensated NARs do not
benefit from the client protections and disciplinary processes that
apply to attorneys, they may have limited recourse if they are harmed
by the misconduct of compensated NARs.\19\
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\15\ See, e.g., Cal. Bus. & Prof. Code Sec. 17200 (amended
1992) (prohibiting any unlawful, unfair or fraudulent business act
or practice and unfair, deceptive, untrue or misleading
advertising).
\16\ Generally, licensed attorneys are required to have: (1)
completed a bachelor's degree program (or its equivalent) and a
legal education as required by a licensing state; (2) passed a state
bar exam; (3) passed the Multistate Professional Responsibility
Examination; (4) passed a licensing state's character and fitness
review, which includes questions about academic conduct at law
school, criminal history, social conduct in general and any
applicable disciplinary actions; and (5) taken a legal binding oath
with a licensing state's supreme court or high-court equivalent. In
addition, many states require attorneys to complete continuing legal
education, including ethics credits, to maintain a law license. For
more information on state-by-state requirements to become a lawyer,
see generally https://www.lawyeredu.org.
In addition, all jurisdictions require lawyers to abide by rules
of professional conduct, which are enforced through state
disciplinary processes. See Peter A. Joy, Making Ethics Opinions
Meaningful: Toward More Effective Regulation of Lawyers' Conduct, 15
Geo. J. Legal Ethics 313, 317 (2002).
\17\ See, e.g., Cal. Rules of Prof'l Conduct R. 7 (2018)
(ensuring that attorney advertisements or solicitations are not
misleading, clearly identifiable as advertisements; ensuring the
advertiser's accountability; and mitigating the use of any undue
duress or pressure by prohibiting, for example, solicitation of a
potential client through in-person, telephone or real-time
electronic communication); N.Y. Rules of Prof'l Conduct R. 7.3
(amended 2017) (prohibiting attorneys from engaging in solicitation
or advertisement by in-person or telephone contact or by real-time
or interactive computer-accessed communication unless the recipient
is a close friend, relative, former client or existing client;
providing examples of prohibited forms of solicitations and
advertisements); Restatement (Third) of The Law Governing Lawyers
Sec. 1 cmt. b (2000) (providing that federal courts often apply the
ethical rules and standards adopted by the state in which the court
sits). NARs may be subject to more general state marketing
regulations. See, e.g., Cal. Bus. & Prof. Code Sec. 17511 (amended
2023) (requiring telephone solicitors to register prior to doing
business in California).
\18\ A ``client protection fund'' is a pool of money funded and
maintained by a bar association or regulatory agency, the purpose of
which is to reimburse clients who have suffered financial loss due
to the dishonest acts of lawyers. See American Bar Association
(``ABA''), A History of Client Protection Rules, https://www.americanbar.org/groups/professional_responsibility/resources/client_protection/history; see also ABA Center on Professional
Responsibility, Survey of Lawyers' Funds for Client Protection 2017-
2019, at 8 (2020), https://qa.americanbar.org/content/dam/aba/administrative/professional_responsibility/2017-2019-cp-survey.pdf.
\19\ FINRA notes that it does not have direct authority to
investigate or discipline representative misconduct in the DRS
forum. Cf. FINRA Rule 8310 (allowing FINRA to impose sanctions on
member firms and persons associated with member firms). Currently,
if an attorney is allegedly engaging in misconduct in the DRS forum,
FINRA may make a referral to the attorney's disciplinary agency,
which has processes to respond to misconduct of attorneys subject to
its jurisdiction. If a compensated NAR is allegedly engaging in
misconduct in the DRS forum, FINRA may make a referral to law
enforcement or an appropriate state agency.
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FINRA also is concerned that parties may be harmed due to the lack
of recourse when compensated NARs are found to be engaged in the
unauthorized practice of law pursuant to the law of the relevant U.S.
jurisdiction. Compensated NARs have, for example, been enjoined from
continuing their representation of parties during pending arbitrations
after courts determined that the representation constituted the
unauthorized practice of law.\20\ DRS arbitrators have also issued
awards dismissing claims, or finding against investors, after
determining that a compensated NAR's representation of the investor
constituted the unauthorized practice of law in the jurisdiction.\21\
The compensated NAR's unauthorized practice of law may also be part of
a broader pattern of misconduct that harms customers.\22\
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\20\ See, e.g., Empire Asset Mgmt. Co. v. Sherer, 19-555-CB
(Mich. 5th Cir. Ct. Feb. 7, 2020); see also Disciplinary Counsel v.
Alexicole, Inc., 822 NE2d 348, 350 (Ohio 2004) (finding that the
representation of parties in securities arbitration by non-attorneys
constituted the unauthorized practice of law).
\21\ See, e.g., Simon v. Aegis Cap. Corp., FINRA Disp. Resol.
Case No. 15-02865 (2016) (Parker, Arb.) (finding that customer
claimant was not entitled to an award and was responsible for the
DRS forum fees, either because the claimant's submissions were
invalidated by the compensated NAR's unauthorized practice of law,
or because the claimant had not sustained his burden of proof);
Halling v. Cape Sec. Inc., FINRA Disp. Resol. Case No. 16-00519
(2017) (Brahin, Arb.) (finding that representation by compensated
NARs in the DRS forum was not legally permissible in Kansas, and
striking customer claimant's pleadings); see also Wells v. Worden
Cap. Mgmt., LLC, FINRA Disp. Resol. Case No. 19-02241 (2020)
(Carvell, Arb.) (ordering claimant to proceed pro se or retain an
attorney following compensated NAR's withdrawal in response to
respondents' motion to strike the statement of claim on the basis
that claimant's compensated NAR engaged in the unauthorized practice
of law by filing the claim); Neuss v. Wells Fargo Inv., LLC, FINRA
Disp. Resol. Case No. 10-01320 (2011) (Albini, Arb.) (partially
granting respondents' motion in limine to disqualify claimants'
compensated NAR, and denying claimants' motion to suspend the
hearing and dismiss claims without prejudice); Best v. Columbus
Advisory Group, Ltd., FINRA Disp. Resol. Case No. 18-03337 (2020)
(Putnam, Arb.) (dismissing claimant's case with prejudice as a
sanction for material and intentional failure to comply with the
arbitrator's order issued during the compensated NAR's
representation of the claimant).
\22\ See Chambliss, supra note 9 and accompanying text. A number
of commenters raised other concerns about compensated NARs'
unauthorized practice of law. See infra notes 96-99 and accompanying
text.
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The current rule's prohibition on representing a party if state law
prohibits the representation does not fully address the concern with
the unauthorized practice of law by compensated NARs, because it is not
always clear in advance of the arbitration or mediation whether a
compensated NAR's representation of a party in arbitration or mediation
in a particular jurisdiction is legally permissible.\23\ FINRA is not
aware of any U.S. jurisdiction that explicitly allows parties to be
represented by compensated NARs in the DRS forum by statute or rule.
Only a few U.S. jurisdictions' unauthorized practice of law or
professional conduct committees have specifically addressed compensated
NAR representation of parties in arbitration or mediation in the DRS
forum, and those that have done so concluded that their representation
in the DRS forum constitutes the unauthorized practice of law.\24\ Many
other U.S. jurisdictions' standards may be less clear, but could
potentially be interpreted as prohibiting compensated NARs from
representing parties in the DRS forum.\25\ In New York, compensated
NARs rely on trial-level court opinions to represent parties in the DRS
forum.\26\
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\23\ See FINRA Rules 12208(c), 13208(c) and 14106(c).
\24\ Unauthorized practice of law or professional conduct
committees in Florida, Illinois and Ohio have concluded that
compensated NAR representation of parties in securities arbitration
constitutes the unauthorized practice of law. See Fla. Bar Re
Advisory Op. on Nonlawyer Representation in Sec. Arbitration, 696
So. 2d 1178, 1180 (Fla. 1997) (concluding that compensated non-
attorney representation of customers in securities arbitration
constitutes the unauthorized practice of law and enjoining non-
attorneys from representing customers for compensation in securities
arbitration proceedings); Ill. State Bar Ass'n Standing Comm'n on
Prof'l Conduct, Advisory Op. 13-03, at 7 (2013), https://www.isba.org/sites/default/files/ethicsopinions/13-03.pdf (stating
that non-attorney representation in a FINRA arbitration generally
constitutes the unauthorized practice of law and suggesting that
FINRA arbitrators notify FINRA and the Illinois Attorney
Registration and Disciplinary Committee if a non-attorney represents
a party in FINRA arbitration); Disciplinary Counsel v. Alexicole,
Inc., 822 NE2d 348, 350 (Ohio 2004) (finding that the representation
of parties in securities arbitration and mediation by non-attorneys
constitutes the unauthorized practice of law); see also Sara Rudolph
Cole, Blurred Lines: Are Non-Attorneys Who Represent Parties in
Arbitrations Involving Statutory Claims Practicing Law? 48 U.C.
Davis L. Rev. 921, 948-958 (2015) (noting that unauthorized practice
of law or professional conduct committees in Florida, Illinois and
Ohio have concluded that compensated NAR representation of parties
in securities arbitration constitutes the unauthorized practice of
law). In addition, two committees of the Illinois State Bar
Association sent three comment letters to the Notice in support of
prohibiting compensated NARs and argued that their representation of
parties in the DRS forum constituted the unauthorized practice of
law. See infra note 83 and accompanying text.
\25\ See, e.g., Tex. Gov't Code Sec. 81.101 (amended 1999)
(stating that practice of law includes ``a service rendered out of
court, including the giving of advice or the rendering of any
service requiring the use of legal skill or knowledge,'' and that
this definition was ``not exclusive and does not deprive the
judicial branch of the power and authority under both this chapter
and the adjudicated cases to determine whether other services and
acts not enumerated may constitute the practice of law''); Ky. SCR
Rule 3.020 (amended 1978) (defining the practice of law as ``any
service rendered involving legal knowledge or legal advice, whether
of representation, counsel or advocacy in or out of court, rendered
in respect to the rights, duties, obligations, liabilities, or
business relations of one requiring the services.'').
\26\ See DePalo v. Lapin, Index No. 114656/2008 (Sup. Ct. NY
June 30, 2009); but cf. Aegis J. Frumento & Stephanie Korenman,
Rethinking Non-Lawyer Advocacy in FINRA Customer Arbitrations, Sec.
Arb. Commentator, March 17, 2017, at 1 (noting that the New York
state court in Lapin only considered the status of a non-lawyer
advocate in the context of deciding that his status as a non-lawyer
did not render his statements any less privileged than those of any
of the other participants in the arbitration).
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Proposed Rule Change
FINRA Rules 12208(c), 13208(c) and 14106(c) currently prohibit
[[Page 71054]]
compensated and uncompensated NARs from representing parties in
arbitration and mediation if: (1) state law prohibits such
representation; (2) the person is currently suspended or barred from
the securities industry in any capacity; or (3) the person is currently
suspended from the practice of law or disbarred. FINRA Rules 12208(d),
13208(d) and 14106(d) further provide that issues regarding the
qualifications of a person to represent a party in arbitration or
mediation are governed by applicable law and may be determined by an
appropriate court or other regulatory agency.
FINRA is proposing to amend the Codes to revise and restate the
qualifications for representatives of parties using the DRS forum, and,
for the reasons discussed above and below, to disallow compensated NARs
from representing parties in the DRS forum.\27\ In addition, the
proposed amendments would codify that a student enrolled in a law
school participating in a law school clinical program or its equivalent
and practicing under the supervision of an attorney may represent
investors in the DRS forum.\28\ The proposed amendments would also
clarify the circumstances in which any person, including attorneys,
would be prohibited from representing a party in the DRS forum,\29\ and
that a challenge to the qualifications of a representative made outside
of the proceeding would not stay or otherwise delay the proceeding
without a court order.\30\
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\27\ See proposed Rules 12208(b)(1), 13208(b)(1) and
14106(b)(1). The proposed rule change would apply to all members,
including members that are funding portals or have elected to be
treated as capital acquisition brokers (``CABs''), given that the
funding portal and CAB rule sets incorporate the impacted FINRA
rules by reference.
\28\ See proposed Rules 12208(b)(1)(B), 13208(b)(1)(B) and
14106(b)(1)(B).
\29\ See proposed Rules 12208(b)(2), 13208(b)(2) and
14106(b)(2).
\30\ See proposed Rules 12208(c), 13208(c) and 14106(c).
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A. Disallowing Compensated NARs in the DRS Forum
The proposed rule change would disallow a person who is not an
attorney and who may receive compensation in any manner in connection
with the representation (i.e., a compensated NAR) from representing a
party at any stage of an arbitration or mediation proceeding held in a
U.S. hearing location.\31\ This prohibition would apply if any form of
monetary or non-monetary compensation would be received by the NAR in
connection with the representation.
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\31\ See proposed Rules 12208(b)(2)(D), 13208(b)(2)(D) and
14106(b)(2)(D); see also proposed Rules 12208(b)(1)(C),
13208(b)(1)(C) and 14106(b)(1)(C).
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As noted above, compensated NARs represent customers in one percent
of customer cases and only a few compensated NARs regularly practice in
the DRS forum today.\32\ Despite the infrequency of compensated NAR
representation, as discussed above, FINRA's review identified multiple
allegations of improper conduct by compensated NARs, whose clients are
not protected by the professional qualification requirements, ethical
rules, disciplinary processes and client protections that apply when
parties retain licensed attorneys.\33\ Moreover, parties may be harmed
due to the lack of recourse when compensated NARs are found to be
engaged in the unauthorized practice of law.\34\ These concerns are
heightened due to the pecuniary incentives of compensated NARs when
seeking new customer relationships or bringing claims in the DRS forum,
such as engaging in aggressive sales techniques to obtain their
business, pursuing frivolous claims, and charging clients non-
refundable processing or investigation fees.
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\32\ See supra note 7 and accompanying text.
\33\ See supra Item II.A.1. (discussing Background).
\34\ See supra notes 20 and 21 and accompanying text.
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Accordingly, FINRA believes that it is appropriate to disallow
their representation of parties in proceedings in the DRS forum.
FINRA understands that some parties with claims of $100,000 or less
may have difficulty obtaining legal counsel. An attorney may, for
example, believe that their share of a potential award might be too
small to justify the effort. In addition, not all investors will
qualify for assistance by, or are able to be serviced by, SACs.\35\
FINRA recognizes that some parties with smaller claims who might
otherwise consider representation by a compensated NAR may not be able
to obtain representation as a result of the proposed rule change.\36\
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\35\ See supra note 4; see also infra Item II.C.(B) (summarizing
comments, including from SACs, about the limitations on the
availability of representation in the DRS forum).
\36\ FINRA notes that it makes available efficient and cost-
effective alternative processes to a full arbitration proceeding for
certain smaller claims. For example, claimants may proceed ``on the
papers,'' where a chair-qualified arbitrator will make a decision
based solely on the documents submitted. See FINRA Rules 12800 and
13800; see also Simplified Arbitrations: Three Ways to Present Your
Case to Arbitrators, https://www.finra.org/arbitration-and-mediation/simplified-arbitrations.
FINRA has also introduced several incentives to encourage
parties with smaller claims to resolve their disputes through FINRA
mediation. For example, FINRA may offer mediation by telephone at no
cost or at a significantly reduced hourly fee to parties arbitrating
certain smaller claims. FINRA also encourages parties in arbitration
to mediate by waiving the fee to postpone a hearing, except in cases
of late postponement requests. See FINRA's Mediation Program for
Small Arbitration Claims, https://www.finra.org/arbitration-mediation/finras-mediation-program-small-arbitration-claims.
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B. Required Statement of No Compensation for Uncompensated NAR
Representation
Proposed Rules 12208(b)(1)(C), 13208(b)(1)(C) and 14106(b)(1)(C)
would provide that a party could be represented in arbitration or
mediation by an uncompensated NAR, provided that prior to the
representation, the uncompensated NAR or party files the required
written statement with the Director through the Party Portal.\37\ The
written statement would have to be signed by the uncompensated NAR and
the party and attest that the uncompensated NAR has not received, and
will not receive, compensation in connection with the
representation.\38\ The proposed amendment would help ensure that the
NAR is truly uncompensated.
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\37\ Under the Customer and Industry Codes, the term
``Director'' means the Director of DRS. See FINRA Rules 12100(m),
12103, 13100(m) and 13103. Under the Mediation Code, the term
``Director'' refers to the Director of Mediation of DRS. See FINRA
Rules 14100(d) and 14103.
The Party Portal provides forum users with a secure, online
location for claim filing and interactions relating to case
administration. Parties use the Party Portal to, among other things,
file claims, pay filing fees, receive documents from and send
documents to DRS, receive service of claims, submit answers to
claims, submit additional case documents, view the status of cases,
select arbitrators, schedule hearings and send documents to other
Party Portal case participants. See, e.g., FINRA Rules 12300, 12302,
12402, 12403, 13300, 13302 and 13404. Since mediation is voluntary
in all instances, DRS permits parties to a mediation proceeding to
use the Party Portal on a voluntary basis to submit and view their
mediation case information and documents. See FINRA Rule 14109(b)
and (h).
\38\ See proposed Rules 12208(b)(1)(C), 13208(b)(1)(C) and
14106(b)(1)(C).
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FINRA believes that it would generally be appropriate to allow
persons who wish to assist a party without receiving compensation, such
as relatives or friends, to represent them in the proceeding. FINRA has
not become aware of any concerns with uncompensated NARs' conduct. On
the other hand, as discussed above and below, forum users have asserted
that compensated NARs cold call investors with aggressive sales
tactics; \39\ pursue frivolous claims; \40\ misrepresent or willfully
fail to disclose important facts relating to their background; \41\
achieve worse outcomes or awards for their
[[Page 71055]]
clients or settle cases for lower amounts than attorneys; \42\ and work
in coordination with persons who are suspended or barred from the
securities industry.\43\ The proposed rule change would prohibit
compensated NARs from representing parties in the DRS forum, decreasing
the risk of potential harm to parties. Unlike compensated NARs,
uncompensated NARs lack a direct pecuniary incentive to engage in
misconduct when seeking new client relationships or participating in
arbitrations or mediations in the DRS forum. However, uncompensated
NARs would continue to be disallowed from representing a party if the
laws of the relevant U.S. jurisdiction prohibits the
representation.\44\
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\39\ See infra note 88 and accompanying text.
\40\ See infra note 89 and accompanying text.
\41\ See, e.g., PIABA, infra note 115.
\42\ See David E. Robbins, 1 Sec. Arb. Proc. Manual Sec. 6-2,
Release No. 26 (5th ed. 2022); infra note 90 and accompanying text.
\43\ See infra note 87 and accompanying text.
\44\ See infra note 49 and accompanying text.
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C. Codifying the Role of Law Students and SACs
FINRA also is proposing to amend the Codes to codify the current
practice whereby a party may be represented by a student enrolled in a
law school participating in a law school clinical program or its
equivalent and practicing under the supervision of an attorney.\45\
Currently, the Codes do not specifically address the representation of
parties in the DRS forum by law students. Currently, 10 SACs operate in
five states and the District of Columbia.\46\ SACs and the law students
who participate in these programs provide an inexpensive option for
customers who qualify and may not be able to find or afford an
attorney. Moreover, these representations may be regulated by state
rules that govern the performance of legal services by law students and
the attorneys who supervise them.\47\ Accordingly, FINRA believes that
it would be appropriate to codify the role of law students--who would
otherwise technically be considered NARs under the proposed rule
change--in providing representation to investors through SACs.
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\45\ See proposed Rules 12208(b)(1)(B), 13208(b)(1)(B) and
14106(b)(1)(B).
\46\ See supra note 4.
\47\ See, e.g., N.Y. CLS Rules Sup. Ct. 805.5 (amended 2019);
Cal. R. Ct. 9.42 (amended 2019); Fla. Bar Reg. R. 11 (amended 2023);
Kan. Sup. Ct. R. 715 (adopted 2022); D.C. Ct. App. R. 48 (amended
2014); O.C.G.A. Title 15, Ch. 20 (amended 1994); see also Peter A.
Joy & Robert R. Kuehn, Conflict of Interest and Competency Issues in
Law Clinic Practice, 9 Clinical L. Rev. 493 (2002) (describing the
ethical obligations of law students and supervising attorneys).
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D. Persons Prohibited From Representing Parties in the DRS Forum
The Codes currently provide that non-attorneys may not represent a
party if state law prohibits such representation, the person is
currently suspended or barred from the securities industry in any
capacity or the person is currently suspended from the practice of law
or disbarred.\48\ The proposed rule change would retain the substance
of these provisions, while clarifying that the laws of U.S.
jurisdictions that are not states may also disqualify the person from
representing a party.\49\ In addition, because FINRA believes that all
persons should be prohibited from practicing in the DRS forum for these
reasons, the proposed amendments would also apply these prohibitions
generally to all persons including attorneys.\50\
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\48\ See FINRA Rules 12208(c), 13208(c) and 14106(c).
\49\ See proposed Rules 12208(b)(2)(A), 13208(b)(2)(A) and
14106(b)(2)(A).
\50\ See proposed Rules 12208(b)(2)(C), 13208(b)(2)(C) and
14106(b)(2)(C). If the SEC approves the proposed rule change, the
prohibitions would not apply retroactively to attorneys who were
suspended or barred from the securities industry prior to the
effective date of the proposed rule change.
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The proposed rule change would also specify that a person who is
currently suspended from or denied the privilege of appearing or
practicing before the Commission may not represent a party in the DRS
forum.\51\ FINRA believes that incorporating these standards into the
proposed rule change would help protect the integrity and quality of
the DRS forum and protect investors.
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\51\ See proposed Rules 12208(b)(2)(D), 13208(b)(2)(D) and
14106(b)(2)(D). If the SEC approves the proposed rule change, this
prohibition would not apply retroactively to persons who were
suspended or denied the privilege of appearing or practicing before
the Commission prior to the effective date of the proposed rule
change. Pursuant to SEC Rule of Practice 102(e), the Commission may
(1) deny the privilege of appearing or practicing before it to any
person about whom the Commission has made certain findings after
notice and opportunity for hearing in the matter; (2) suspend
professionals from appearing or practicing before it upon their
disbarment, license revocation or suspension, or conviction of a
crime involving moral turpitude; or (3) temporarily suspend from
appearing or practicing before it professionals who become subject
to certain permanent injunctions or findings. See 17 CFR 201.102(e)
(amended 2005). The rule was adopted ``to protect the integrity and
quality of [the Commission's] system of securities regulation and,
by extension, the interests of the investing public.'' See
Securities Exchange Act Release No. 40567 (October 19, 1998), 63 FR
57164, 57165 (October 26, 1998) (Order Approving File No. S7-16-98)
(adopting amendments to Rule 102(e)(1)). In addition, pursuant to
Section 205.6(b) of the Standards of Professional Conduct for
Attorneys Appearing and Practicing Before the Commission in the
Representation of an Issuer, the Commission may also deny attorneys
the privilege of appearing or practicing before the Commission if
they violate minimum standards of professional conduct in connection
with the representation of an issuer. See 17 CFR 205.6(b) (2003).
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E. Determinations of Qualifications of Representatives
The Codes currently provide that issues regarding the
qualifications of a person to represent a party in arbitration or
mediation are governed by applicable law and may be determined by an
appropriate court or other regulatory agency, and that in the absence
of a court order, the proceeding shall not be delayed, or an
arbitration stayed, pending resolution of such issues.\52\ The proposed
rule change would retain the substance of the current provision, which
prevents delay while a challenge to the qualifications of a person to
represent a party is resolved outside of the DRS forum. However, the
proposed rule change would make some clarifying changes to the current
provision. Specifically, the proposed rule change would state that a
challenge to the qualifications of a representative made outside of the
arbitration proceeding shall not stay or otherwise delay the proceeding
in the absence of a court order.\53\ The proposal would remove the
explicit reference to courts and regulatory agencies' separate
authority to determine issues regarding the qualifications of a person
to represent a party in arbitration (by, for example, determining that
doing so would constitute the unauthorized practice of law) as
unnecessary and to simplify the language.
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\52\ See FINRA Rules 12208(d), 13208(d) and 14106(d).
\53\ See proposed Rules 12208(c), 13208(c) and 14106(c).
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If the Commission approves the proposed rule change, FINRA will
announce the effective date of the proposed rule change in a Regulatory
Notice. If approved, the amendments would be effective for arbitrations
and mediations filed in the DRS forum on or after the effective date.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\54\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. The proposed rule change balances the need for
parties, including investors, to be able to avail themselves of
representation in the DRS forum with protecting those parties, the
integrity of the DRS forum, and the
[[Page 71056]]
public interest generally from the potential harmful conduct and lack
of recourse that may come from representation by compensated NARs.
---------------------------------------------------------------------------
\54\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
FINRA believes that by disallowing compensated NARs from
representing parties in the DRS forum, the proposed rule change will
reduce the risk that parties, including investors, may be harmed by the
activities of compensated NARs, only a few of which currently practice
in the DRS forum. Although compensated NARs represent customers in one
percent of the customer cases in the DRS forum, their actions may
result in significant harm to those customers. This risk of harm is
especially concerning because there is no direct regulation of
compensated NAR conduct. As discussed above, FINRA's review identified
multiple allegations of improper conduct by compensated NARs, who are
not subject to the specific and extensive professional qualification
requirements, ethical rules, disciplinary processes and client
protections that apply to attorneys.\55\
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\55\ See supra Item II.A.1. (discussing Background).
---------------------------------------------------------------------------
These concerns are heightened due to the pecuniary incentives of
compensated NARs when seeking new customer relationships or bringing
claims in the DRS forum, such as engaging in aggressive sales
techniques to obtain their business,\56\ pursuing frivolous claims,\57\
and charging clients non-refundable processing or investigation
fees.\58\
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\56\ See infra note 88 and accompanying text.
\57\ See infra note 89 and accompanying text.
\58\ See infra note 91 and accompanying text.
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Unlike compensated NARs, uncompensated NARs (often friends or
relatives of a party) lack this direct pecuniary incentive to engage in
misconduct when seeking new client relationships or bringing claims in
the DRS forum. In addition, unlike uncompensated NARs, law students
seeking educational opportunities to gain legal experience participate
in SACs under the supervision of attorneys and typically represent
parties pro bono. Accordingly, FINRA believes that to protect investors
and the public interest, it is appropriate to disallow compensated
NARs' representation of parties in the DRS forum.
The proposed amendments will also protect investors and the public
interest by requiring uncompensated NARs, or the party they are
representing, to submit a written statement that the NAR has not
received, and will not receive, compensation in connection with the
arbitration or mediation. This will help ensure that the NAR is truly
uncompensated.
The proposed rule change will also help protect investors and the
public interest by codifying the ability of parties to be represented
by law students through SACs.\59\ SACs provide an inexpensive option
for customers who qualify and may not be able to find or afford an
attorney. Codifying the ability of customers to be represented by law
students through SACs may also make customers more aware of this
alternative option for representation.
---------------------------------------------------------------------------
\59\ See supra note 45 and accompanying text.
---------------------------------------------------------------------------
The proposed rule change will also protect investors and the public
interest by explicitly prohibiting any person, including attorneys,
from representing a party if they are prohibited from doing so by the
laws of the relevant U.S. jurisdiction; if they are currently suspended
or barred from the securities industry; suspended or disbarred from the
practice of law; or currently suspended or denied the privilege of
appearing or practicing before the Commission.
Finally, the proposed rule change will help ensure the fair,
orderly and efficient administration of the DRS forum by providing that
a challenge to the qualifications of a representative made outside of
the arbitration or mediation proceeding shall not delay the proceeding
in the absence of a court order.
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. A discussion of the economic
impacts of the proposed rule change follows.
Economic Impact Assessment
1. Regulatory Need
A large body of literature on the economics of expert services
considers the necessity of professional standards and other
restrictions on service providers when individuals have little ability
to evaluate the quality of the service that they receive.\60\ This
literature suggests that in the DRS forum, parties with little prior
experience seeking representation would be vulnerable, absent
sufficient restrictions, to retaining lower-quality services.
---------------------------------------------------------------------------
\60\ A general survey is in Uwe Dulleck & Rudolf Kerschbamer, On
Doctors, Mechanics, and Computer Specialists: The Economics of
Credence Goods, 44(1) J. Econ. Literature, 5-42 (2006); see also
Organization of Economic Cooperation and Development [OECD],
Competitive Restrictions in Legal Professions, (April 27, 2009),
https://www.oecd.org/regreform/sectors/40080343.pdf (discussing the
regulation of legal services); Camille Chaserant & Sophie Harnay,
The Regulation of Quality in the Market for Legal Services: Taking
the Heterogeneity of Legal Services Seriously, 10(2) Eur. J. Compar.
Econ. 267, 267-291 (2013) (reviewing the public and private interest
approaches to the regulation in the market for legal services).
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Allegations relating to the conduct of compensated NARs in the DRS
forum suggest that these concerns are not just hypothetical.\61\
Compensated NARs are not subject to the client protections and
disciplinary processes that apply to attorneys. Parties in the DRS
forum may have little prior experience bringing claims and seeking
representation.\62\ The result may be that these parties are not
sufficiently protected by competition, the reputation of providers, and
the client protections and disciplinary procedures that apply to
attorneys. In addition, harm may be incurred not only by the parties
who retain compensated NARs but also by the other parties to the
dispute.
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\61\ See infra note 71 (discussing the harm that may relate to
the pecuniary incentives of compensated NARs); see also supra notes
9-14 and accompanying text.
\62\ FINRA has taken a number of steps to make arbitration and
mediation accessible and affordable to parties. See supra note 36.
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To address this risk of harm, the proposed rule change would
prohibit compensated NARs from representing parties in the DRS forum.
The proposed rule change, however, would not prohibit representation by
uncompensated NARs or law students, as discussed further below.
2. Economic Baseline
The economic baseline for the proposed rule change is the current
provisions of the Codes. The economic baseline also includes the laws
of the relevant U.S. jurisdiction relating to the representation of
parties. The proposed rule change is expected to affect compensated and
uncompensated NARs, SACs and attorneys who may represent parties in the
DRS forum. The proposed rule change also is expected to affect the
parties to arbitrations and mediations including customers, member
firms and associated persons.
Customers in the DRS forum retain compensated NARs and SACs in a
relatively small number of cases.\63\ From
[[Page 71057]]
January 2017 to December 2021 (the ``sample period''), 12,024 cases
with a customer as a claimant were closed in the DRS forum.\64\ A
customer was represented by a compensated NAR in 119 of the 12,024
cases (one percent),\65\ and by a SAC in 67 of the 12,024 cases (less
than one percent). Four different compensated NAR firms represented
customers in the sample period, with two of the firms representing
customers in 102 of the 119 cases (86 percent).\66\ Fifteen SACs also
represented customers during the sample period.\67\ In the remaining
cases, the customer was represented by an attorney in 10,620 cases (88
percent), and appeared pro se in 1,218 cases (10 percent).\68\
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\63\ FINRA can reasonably estimate, through a search and textual
match of representative and organizational names, the number of
compensated NARs and SACs that have represented parties in the DRS
forum. This methodology, however, may not identify all such cases.
The estimates herein describing the number of cases in which a party
was represented by compensated NARs or SACs can, therefore, be
considered a lower bound of the number of cases in which compensated
NARs and SACs represented parties during the sample period (defined
below). In general, information is not available for FINRA to
reasonably estimate the number of uncompensated NARs who have
represented parties in the DRS forum.
\64\ FINRA did not identify any cases during the sample period
where a customer who was a respondent was represented by a
compensated NAR or SAC. Cases in the DRS forum are typically filed
in arbitration rather than mediation. Of the 12,024 cases that were
closed in the DRS forum, 9,824 cases were filed and closed in
arbitration (82 percent), 2,069 cases were filed in arbitration but
resulted in a mediation (17 percent), and 131 cases were both filed
and closed in mediation (one percent). FINRA also identified 373
instances where customers initiated a pre-arbitration mediation but
no mediation took place, often because the opposing party did not
agree to mediate the dispute or the matter was not eligible for
mediation. In most of these instances, customers initiated the
mediation without representation.
\65\ FINRA identified 52 cases filed during the sample period
where a compensated NAR represented a customer as claimant at the
time of the filing, but was then not retained for the duration of
the arbitration.
\66\ FINRA identified one case among the 12,024 sample customer
cases in which a compensated NAR represented an associated person.
To simplify the analysis, the Economic Impact Assessment focuses on
compensated NAR representation of customers only. FINRA also
identified one compensated NAR who represented associated persons in
multiple expungement claims brought against broker-dealers in 2020
and 2021.
\67\ Currently, 10 SACs provide representation to parties in the
DRS forum. See supra note 4.
\68\ The 10,620 cases may include some instances in which
customers were represented by uncompensated NARs rather than an
attorney. However, in the experience of FINRA staff, few customers
are represented by uncompensated NARs.
---------------------------------------------------------------------------
The customers who were represented by compensated NARs or SACs had
a higher percentage of smaller claims than customers who were
represented by attorneys. The following table describes the size of
claims by representation type.
[GRAPHIC] [TIFF OMITTED] TN13OC23.077
The subsequent table describes case outcomes by representation
type. In the table below, FINRA identified case outcomes as resulting
in settlement (Settlements), closed by hearing or ``on the papers''
(Awards), withdrawn (Withdrawn), or closed by other means (All
Others).\69\ For the cases closed by hearing or ``on the papers,''
FINRA also identified the number of cases where customers were awarded
damages (Award >$0). The relative outcomes for compensated NARs (e.g.,
that they settle a smaller proportion of cases) may neither support nor
contradict the anecdotal evidence that compensated NARs achieve worse
outcomes or awards for their clients than attorneys, but may instead
reflect the characteristics of the claims.
---------------------------------------------------------------------------
\69\ The cases that closed by other means include claims that
were deficient and therefore not served on respondents, claims where
the use of the DRS forum was not permitted, and claims that were
combined with separate but related claims.
[GRAPHIC] [TIFF OMITTED] TN13OC23.078
[[Page 71058]]
3. Economic Impact
A. Overview
In general, the proposed rule change would address the
representation of parties by NARs and law students through SACs. The
economic effects relating to these proposed amendments are discussed
below.\70\
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\70\ FINRA anticipates the other proposed amendments would not
result in material economic impacts. For example, the proposed rule
change would clarify that the laws of U.S. jurisdictions that are
not states may also disqualify attorneys or non-attorneys from
representing parties, and prohibit attorneys from representing a
party if they are currently suspended or barred from the securities
industry. FINRA is not aware of previous instances where these
amendments would impact the representation of parties in the DRS
forum or result in its associated benefits or costs. These other
proposed amendments are not discussed below.
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B. Anticipated Benefits
Prohibiting compensated NARs from representing parties in the DRS
forum ensures that no party faces the risk of harm that has been
associated with compensated NARs.\71\ The parties who may benefit
include those who would have retained a compensated NAR (with the
associated risks) and that achieve the same or superior arbitration
outcome with different representation net of any additional financial
cost. The other parties to the arbitration or mediation may benefit if
there is a reduction in frivolous claims or arguments, thereby reducing
the costs (e.g., the legal expense and time that would otherwise be
used for other business) to resolve disputes. Parties with fewer
resources to resolve disputes (e.g., small firms) may benefit more from
the reduction in frivolous claims or arguments than parties with
greater resources.\72\
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\71\ The risk of harm would relate to the pecuniary incentives
of compensated NARs when seeking new client relationships (e.g.,
aggressive sales techniques such as cold calling) or bringing claims
in the DRS forum. See infra notes 88, 89 and 91 and accompanying
text. FINRA cannot quantify the extent to which the absence of
client protections and disciplinary processes that apply to
attorneys may influence the conduct of compensated NARs or the
effectiveness of those disciplinary processes on the conduct of
attorneys. Survey evidence from 43 states and the District of
Columbia reported by the ABA suggests that in 2019 approximately 0.2
percent of all practicing attorneys were publicly disciplined for
misconduct. See ABA Profile of the Legal Profession 2022, https://www.americanbar.org/content/dam/aba/administrative/news/2022/07/profile-report-2022.pdf.
\72\ See M. Kaplan, infra note 89.
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Parties may also benefit from increased certainty, at the outset of
the proceeding, as to whether a party's representative is permitted to
represent a party in the DRS forum. For example, the laws that govern
the representation of parties differ from state to state, and it may be
unclear whether compensated NARs can represent parties in the DRS forum
or are engaged in the unauthorized practice of law.\73\ Parties would
not incur the costs associated with retaining a compensated NAR who is
later determined to be engaging in the unauthorized practice of law. In
these instances, compensated NARs may be enjoined from continuing their
representation of parties during pending arbitrations, and parties may
incur the costs to seek and retain new representation.\74\ Arbitrators
may also issue awards dismissing claims, or finding against parties, if
they determine that a compensated NAR's representation of the party
constitutes the unauthorized practice of law in the jurisdiction.\75\
Parties would also have reasonable certainty that NAR representation is
uncompensated and permitted under the Codes, subject to specified
conditions.
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\73\ See supra notes 24-26 and accompanying text.
\74\ See supra note 20.
\75\ See supra note 21. As discussed below in Item II.B.3.D.,
``Anticipated Competitive Effects,'' parties may benefit from an
increase in DRS forum efficiency (relating to the operation of forum
proceedings) resulting from a decrease in the number of challenges
to compensated NAR representation.
---------------------------------------------------------------------------
Lastly, customers to an arbitration or mediation may benefit from
the codification of the role of law students and SACs in the DRS forum.
Parties would have reasonable certainty that the law students enrolled
in law school are under the supervision of an attorney and permitted to
represent parties in the DRS forum. To the extent that customers may
become more aware of the availability of SACs as a result of the
proposed rule change, and SACs have the capacity to represent them,
customers who have determined the need for representation may incur
fewer costs.
C. Anticipated Costs
The proposed rule change also could impose costs on some parties
who may be more likely to consider compensated NARs for representation
under the baseline (e.g., parties with smaller claims). Some of these
parties may choose compensated NARs who do not engage in misconduct.
Under the proposed rule change, parties who have determined to seek
representation, and would otherwise retain compensated NARs who do not
engage in misconduct, may incur additional costs (e.g., higher fees) to
retain alternative representation (e.g., attorneys) or may forgo
representation and appear pro se. Given the limited data, however, it
is not clear whether the cost of attorney services may increase as a
result of the proposal in states where compensated NARs currently
provide services, but any effect would likely be small given the small
number of matters handled by compensated NARs in any year. Parties
alternatively may forgo representation and appear pro se. These parties
may be less experienced in the DRS forum and as a result may be
inconvenienced or possibly obtain worse outcomes or awards.\76\ We
cannot, however, estimate the extent of this effect.
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\76\ FINRA notes that it advises arbitrators on the treatment of
pro se parties, including advising arbitrators to be sensitive to
the fact that the pro se party is most likely inexperienced in
either litigation or the arbitration process, and that pro se
parties may need some guidance from the panel. See FINRA Dispute
Resolution Services Arbitrator's Guide, https://www.finra.org/sites/default/files/arbitrators-ref-guide.pdf.
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Compensated NARs would lose the business of representing parties in
the DRS forum which may be their sole business. Although compensated
NARs may replace the lost business with other opportunities or
employment, they would incur search costs in the form of time, effort
and expense. These other opportunities or employment may also not be as
profitable as representing parties in the DRS forum. The costs to
compensated NARs from the loss of business would depend on their
earnings from representing parties in the DRS forum, the costs of
searching for other business opportunities or employment, and the
profitability of these other ventures.\77\
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\77\ The loss of business by compensated NARs attributable to
the proposed rule change includes only that which does not
constitute the unauthorized practice of law. The extent to which the
representation of parties by compensated NARs in arbitration or
mediation in a particular jurisdiction is legally permissible is
often not known. See supra note 24 and accompanying text.
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Uncompensated NARs, or the party they are representing, would incur
the cost to prepare and submit a written statement to the Director
attesting that the NAR has not received, and will not receive,
compensation in connection with the representation. FINRA anticipates,
however, that these costs should not be material and would not restrict
uncompensated NARs from representing parties in the DRS forum.\78\
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\78\ See supra Item II.A.1.B. and accompanying text. The
proposed rule change would not permit uncompensated NARs, or the
party they are representing, to refile a previously obtained
statement of no compensation from another case, as these statements
will necessarily be specific to the individual representation.
---------------------------------------------------------------------------
D. Anticipated Competitive Effects
The proposed rule change may result in other economic effects.
These other economic effects relate to the choice of representation in
the DRS forum and the efficiency of the DRS forum.
[[Page 71059]]
Attorneys would have less competition to provide legal services to
parties who may have otherwise considered compensated NARs for
representation, and some attorneys may experience an increase in
business from representing these parties. The shift of business from
the compensated NARs, who would have otherwise been retained by parties
in the DRS forum, is likely not a new economic cost or benefit of the
proposed rule change but is instead an economic transfer from
compensated NARs to attorneys.
The proposed rule change may also impact the efficiency of the DRS
forum to process and resolve disputes in a timely manner. The
efficiency of the DRS forum may increase if the conduct of compensated
NARs would have hindered or delayed the proceedings.\79\ The efficiency
of the DRS forum may also increase as a result of arbitrators no longer
being required to resolve issues regarding the ability of NARs to
represent parties in arbitration.\80\ The efficiency of the DRS forum
to process and resolve disputes may decrease, however, if parties who
have determined the need for representation, and would otherwise retain
compensated NARs if not for the proposed rule change, forgo
representation. These parties may be less familiar with DRS forum
procedures, and this unfamiliarity may result in delays.
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\79\ Commenters stated that participation by compensated NARs
resulted in longer or additional hearings. See Commonwealth and
Harris, infra note 90.
\80\ See supra note 21.
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4. Alternatives Considered
FINRA considered establishing additional requirements on
compensated NARs before they could represent a party in an arbitration
or mediation in the DRS forum, such as requiring compensated NARs to
demonstrate that the applicable state or other U.S. jurisdiction
considers the representation by the compensated NAR in the DRS forum to
be appropriate and legally permissible. FINRA rejected this alternative
as unworkable due to the uncertainty as to whether NARs could legally
represent parties in the DRS forum in different U.S. jurisdictions and
feedback from state institutions indicating that they would not opine
on the ability of a NAR to represent parties in securities arbitration
in the DRS forum.
The proposed rule change would not prohibit uncompensated NARs from
representing parties in the DRS forum. Like compensated NARs,
uncompensated NARs are not subject to the client protections and
disciplinary processes the states and jurisdictions have determined
should apply to attorneys. Unlike compensated NARs, however,
uncompensated NARs do not have the direct pecuniary incentive to engage
in misconduct when seeking new client relationships or bringing claims
in the DRS forum, and FINRA is not aware of any assertions of
misconduct by uncompensated NARs. Further, prohibiting uncompensated
NARs in addition to prohibiting compensated NARs would remove the
possibility of substituting compensated with uncompensated NARs,
although the extent to which individuals would do so is not known.
These parties, and parties who would have otherwise retained
uncompensated NARs, would instead have been required to retain an
attorney or appear pro se.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
In October 2017, FINRA published the Notice requesting comment on
forum users' experiences with compensated NARs and whether FINRA should
further restrict their representation of parties.\81\ FINRA received 59
comment letters in response to the Notice. A copy of the Notice is
available on FINRA's website at http://www.finra.org. A list of the
comment letters received in response to the Notice is available on
FINRA's website.\82\ Copies of the comment letters received in response
to the Notice are available on FINRA's website.
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\81\ Although the Notice was focused on compensated NAR firms,
the commenters who addressed uncompensated NARs and SACs generally
supported continuing to allow them to represent parties in the DRS
forum. See Aidikoff, Bakhtiari, Cornell, Cottone, FSI, Georgia,
Harris, J. Kaplan, M. Kaplan, Pace, PIABA, Port, SIFMA, St. John's
and Wexler. But see CSAG and Sacks (questioning the efficacy of
SACs).
\82\ See SR-FINRA-2023-013 (Form 19b-4, Exhibit 2b) for a list
of abbreviations assigned to commenters (available on FINRA's
website at http://www.finra.org).
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Most of the commenters supported restricting compensated NARs'
ability to represent parties in the DRS forum. Twenty-eight commenters
supported prohibiting the representation of parties by compensated NARs
entirely.\83\ Four commenters supported limiting the dollar value or
complexity of the cases that compensated NARs could handle,\84\ and six
other commenters supported imposing other restrictions on
representation by compensated NARs.\85\ Twenty-one commenters, 15 of
whom were clients of a single NAR firm, supported continuing to allow
compensated NARs to represent parties in the DRS forum.\86\ A summary
of the comments and FINRA's responses are discussed below.
---------------------------------------------------------------------------
\83\ See Aidikoff, Bakhtiari, Bandes, Caruso, Commonwealth,
Cottone, Dobin, Edwards, Feldman, Glick, Harris, Ilgenfritz, ISBA
Business, ISBA Unauthorized, ISBA Task, J. Kaplan, Kohler, M.
Kaplan, Lincoln Financial, Meyer, Nelson, PIABA, Port, Sabino,
SIFMA, St. John's, Sutherland and Wexler.
\84\ See BFS, Cornell, Sec. Arb. Commentator and Wall.
\85\ See Benade, FSI, Georgia, Pace, Starr and Wood.
\86\ See Abrahamsen, A. Lincoln, Bartness, Byrd, CSAG, Flack,
Hambright, Inglis, Kabat, Kashouty, Kuefler, Mitchell, Mulligan,
Neuman, Pate, Sacks, Scronce, Stein, Steinmetz, Stott and Wilson.
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(A) Comments That Supported Prohibiting Compensated NARs From
Representing Parties in the DRS Forum
Criticisms of Compensated NARs
In the Notice, FINRA requested comment on experiences with NAR
firms in the DRS forum and whether FINRA should amend the Codes to
prohibit entirely compensated NARs from representing parties in the DRS
forum. In response, a number of commenters criticized compensated NARs'
conduct in the DRS forum. Some commenters stated that some compensated
NARs are, or work in coordination with, persons who are: (1) suspended
or barred from the securities industry; (2) the subject of customer
complaints; (3) associated with broker-dealers that were expelled from
FINRA membership; or (4) guilty of criminal charges.\87\ Some
commenters stated that compensated NARs may engage in improper business
practices, such as cold calling investors with aggressive sales
tactics, that would be prohibited if they were attorneys.\88\ Other
commenters asserted that compensated NARs bring frivolous cases.\89\ A
number of commenters also stated that compensated NARs mishandle or
achieve worse outcomes or awards for their clients than attorneys, or
that they were not competent, were inexperienced, or were a danger to
investors or to the quality or integrity of the DRS forum.\90\ Several
commenters expressed concerns that compensated
[[Page 71060]]
NARs charge clients non-refundable processing or investigation
fees.\91\
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\87\ See Bakhtiari, Caruso, Dobin, Ilgenfritz, J. Kaplan, Meyer,
M. Kaplan, PIABA and Shepherd.
\88\ See Caruso, Meyer, M. Kaplan, PIABA and Wexler; see also
Kohler.
\89\ See Bandes, Commonwealth, Edwards, Lincoln Financial, M.
Kaplan and SIFMA; see also Kohler.
\90\ See Aidikoff, Caruso, Commonwealth, Cottone, Edwards,
Feldman, Glick, Harris, J. Kaplan, Kohler, Nelson, PIABA, Port,
Sutherland and Wexler.
\91\ See, e.g., PIABA and Wexler. Other commenters stated that
attorneys also charge upfront fees, in the form of a retainer. See,
e.g., Neuman.
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Several commenters also described how clients, and others who deal
with NARs, do not receive the benefit of the numerous protections that
are available to persons who interact with attorneys, including
disciplinary oversight, malpractice insurance, client trust accounts,
rules of professional conduct, legal skills, legal education, or legal
training.\92\ PIABA stated that, unlike attorneys, information about
NARs' disciplinary history was not readily available. Some commenters
described specific ethical duties that lawyers have that do not apply
to NARs, including the duties of loyalty and honesty, to safeguard
client funds and confidentiality.\93\ Some commenters stated that
clients' communications with NARs were not protected by the attorney-
client privilege, a legal principle that prevents the disclosure of
confidential communications with attorneys.\94\
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\92\ See Aidikoff, Bakhtiari, Caruso, Commonwealth, Dobin,
Edwards, Feldman, Ilgenfritz, J. Kaplan, Lincoln Financial, M.
Kaplan, Meyer, PIABA, Port, Sabino, SIFMA, St John's, Sutherland and
Wexler; see also FSI. Other commenters stated that not all attorneys
have malpractice insurance. See, e.g., Neuman.
\93\ See Dobin, Feldman, Ilgenfritz, J. Kaplan, Nelson and
PIABA; see also Caruso.
\94\ See Dobin, Edwards and PIABA.
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FINRA's review of compensated NARs validated some of the
commenters' serious concerns and, as previously noted, identified
allegations about NAR misconduct.\95\ Accordingly, FINRA believes it is
appropriate to disallow compensated NARs from representing parties in
arbitrations and mediations in the DRS forum.
---------------------------------------------------------------------------
\95\ See supra Item II.A.1. (discussing Background).
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Compensated NARs Engage in the Unauthorized Practice of Law
Many of the commenters who supported prohibiting compensated NARs
argued that their representation of parties in the DRS forum
constituted the unauthorized practice of law.\96\ These and other
commenters stated that DRS arbitrations were complex or legal in
nature, or had evolved to become more so over time, and that
representing parties in DRS arbitration necessarily required legal
skills, knowledge and training.\97\ For example, PIABA stated that
``NARs interview clients, draft pleadings, develop litigation strategy,
engage in discovery, negotiate settlements, engage experts, and conduct
examination of witnesses at the arbitration hearing, all of which
involves legal skill and knowledge.''
---------------------------------------------------------------------------
\96\ See Caruso, Dobin, Feldman, Glick, Harris, Ilgenfritz, ISBA
Business, ISBA Task, ISBA Unauthorized, Kohler, Nelson, PIABA, Port,
Sabino, Sutherland and Wexler. Compare Steinmetz (stating that if
any restrictions were imposed, they should be ``ones which prevent
the unauthorized practice of law and to prevent fraud.'')
\97\ See Aidikoff, Feldman, Glick, Ilgenfritz, ISBA Business,
ISBA Task, ISBA Unauthorized, Kaplan, Kohler, Meyer, PIABA, Port,
Sabino, SIFMA and Wexler.
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One commenter, Nelson, stated that the current prohibition on NARs
representing parties when state law prohibits such representation was
insufficient because the requirements of state law may be unclear.\98\
PIABA stated that some claimants have had their claims dismissed
because their NARs were found to have engaged in the unauthorized
practice of law, and suggested that NARs may be operating in states
even where they are prohibited from doing so. Commonwealth and Wexler
suggested that NAR firms were assisting customers with small claims
decided ``on the papers'' without disclosing their representation of
the party to the DRS forum.\99\ Harris and Nelson expressed concern
that as arbitrators, they could be placed in the position of aiding the
unauthorized practice of law when NARs represent parties in the DRS
forum.
---------------------------------------------------------------------------
\98\ See also PIABA (stating that most states have been silent
on the issue of whether the appearance of NARs in an arbitration
forum constitutes the unauthorized practice of law).
\99\ Wexler stated that NAR firms had done so in order to avoid
appearing in a state that would consider the appearance to be the
unauthorized practice of law.
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FINRA shares commenters' concerns about compensated NARs engaging
in the unauthorized practice of law. When represented by compensated
NARs, forum participants do not receive the benefit of the type of
specific professional qualification requirements, ethical rules,
disciplinary processes and other protections that the relevant
jurisdiction has determined should apply to attorney representation. In
addition, as previously noted, customers have had their claims
dismissed or delayed when compensated NARs engaged in the unauthorized
practice of law.\100\
---------------------------------------------------------------------------
\100\ See supra notes 20 and 21 and accompanying text.
---------------------------------------------------------------------------
(B) Comments Addressing Potential Benefits of NARs
Compensated NARs Fill a Void for Customers Who Cannot Find
Representation
In the Notice, FINRA requested comment on the factors that limit
customers' access to attorney representation in arbitration. Several
commenters stated that compensated NARs fill a void for customers who
cannot find or afford counsel.\101\ Some commenters stated that
attorneys are sometimes unwilling to take smaller cases because the
prospects of recovery are low, or because potential claimants may not
be able to afford the retainer fee.\102\ Other commenters stated that
compensated NARs were willing to represent them at a lower cost than
attorneys.\103\ CSAG and Neuman stated that customers who retain
compensated NARs are often from small towns where there is limited
access to counsel who are knowledgeable about securities arbitration.
---------------------------------------------------------------------------
\101\ See CSAG, FSI, Georgia, Hambright, Neuman, Pace, Scronce,
Steinmetz and Wall.
\102\ See Hambright, Neuman, Scronce, Steinmetz and Wall.
\103\ See, e.g., Abrahamsen, A. Lincoln, Inglis, Kabat and
Scronce.
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One commenter, Georgia, stated that until SACs can receive
sustained funding, ``entirely eliminating'' compensated NARs may cause
more valid claims to go unfiled. Georgia recommended that FINRA work
with SACs to identify funding sources to sustain and grow SACs. Pace
stated that when SAC representation is ``not available due to lack of
funding, jurisdictional issues, client preference, or other reasons,
investors who cannot afford a private attorney may turn to NAR firms to
assist them with their claims rather than bringing them pro se or not
at all.''
Twenty-two commenters, 15 of whom were clients of a single NAR
firm, stated that compensated NARs provided effective representation in
the DRS forum or described how they had done so in specific
arbitrations.\104\ Some commenters who had retained the services of a
compensated NAR suggested that they would not have obtained the same
recovery if not for the compensated NAR's involvement.\105\ Kashouty
stated that claimants and respondents should be allowed to make their
own decision as to who will represent them, based on pecuniary or other
considerations. Steinmetz and Neuman stated that it should be a
customer's decision whether to retain a compensated NAR.
---------------------------------------------------------------------------
\104\ See Abrahamsen, A. Lincoln, Bartness, Benade, Byrd, CSAG,
Flack, Hambright, Inglis, Kabat, Kashouty, Kuefler, Mitchell,
Mulligan, Neuman, Pate, Sacks, Scronce, Stein, Steinmetz, Stott and
Wilson.
\105\ See Flack, Hambright, Inglis and Mulligan.
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As noted above, FINRA has taken a number of steps to make
arbitration and mediation accessible and affordable to parties,
particularly those with small claims, and continues to look for ways
[[Page 71061]]
to improve the DRS forum in this regard.\106\ As also previously noted,
despite the low numbers of compensated NARs, FINRA's review identified
multiple allegations of improper conduct by compensated NARs, who are
not subject to the specific and extensive professional qualification
requirements, ethical rules, disciplinary processes and client
protections that apply to attorneys.\107\ On balance, FINRA believes it
is appropriate to disallow compensated NARs from representing parties
in arbitrations and mediations in the DRS forum.
---------------------------------------------------------------------------
\106\ See supra note 36. In recognition of the important role of
SACs, FINRA supports SACs in a number of ways, including by
leveraging its staff and arbitrator and mediator rosters to
participate in law school events, such as judging in competitions,
speaking in seminars, and conducting mock arbitrations and
mediations.
\107\ See supra Item II.A.1. (discussing Background). Notably, a
FINRA arbitrator and securities dispute resolution expert has stated
that FINRA has ``explored amending their rules to ban'' compensated
NARs ``from representing parties as a means to prevent exploitation
of investors, not as a means to decrease access to justice.'' See
Jill Gross, Arbitration Archetypes for Enhancing Access to Justice,
88 Fordham L. Rev., 2319, 2333, n.78 (2020).
---------------------------------------------------------------------------
Compensated NARs Educate Uninformed Customers
In the Notice, FINRA requested comment on the factors that limit
customers' access to attorney representation in arbitration. In
response, several commenters stated that compensated NARs educate
customers about their ability to arbitrate a claim in the DRS
forum.\108\ Several investors who commented stated that they were
unaware of having a valid claim until a NAR firm offered services
through a cold call or unsolicited letter and reviewed their account
statements.\109\ Steinmetz and CSAG stated that some customers with
small claims against brokerage firms and associated persons might only
be made aware of the availability of the DRS forum through the
compensated NARs' marketing efforts.
---------------------------------------------------------------------------
\108\ See A. Lincoln, Byrd, CSAG, Flack, Pate and Steinmetz.
\109\ See A. Lincoln, Byrd, Flack, Hambright, Pate and Wilson;
see also Stott.
---------------------------------------------------------------------------
FINRA notes that it educates customers regarding dispute resolution
and representation in the DRS forum through initiatives led by FINRA's
Office of Investor Education (``OIE'') and the FINRA Investor Education
Foundation (``Foundation'').\110\ For example, both OIE and the
Foundation participate at in-person investor education events.
Separately, the Foundation has published a guide for customers on how
to prevent and resolve securities industry disputes,\111\ and OIE has
provided guidance on what customers should consider when trying to
decide whether to hire an attorney in arbitration or mediation.\112\ In
addition, staff from FINRA's Securities Helpline for Seniors[supreg]
\113\ have been trained to guide senior customers, and individuals
caring for seniors, about the availability of mediation and the ability
to file an arbitration claim in the DRS forum.
---------------------------------------------------------------------------
\110\ OIE engages investors through in-person outreach and the
development and dissemination of articles, alerts and tools. The
Foundation, a subsidiary of FINRA with a separate governance
structure, aims to build financial capability through education and
research. More information can be found at https://www.finrafoundation.org.
\111\ See Investor's Guide to Securities Industry Disputes: How
to Prevent and Resolve Disputes with Your Broker (2009, rev. 2013;
rev. 2017), https://www.finra.org/sites/default/files/Investors_Guide_to_Securities_Industry_Disputes.pdf. The Guide was
authored by a SAC, Pace Investor Rights Clinic, through a grant from
the Foundation.
\112\ See Securities Arbitration--Should You Hire an Attorney?
(Jan. 3, 2019), https://www.finra.org/investors/highlights/securities-arbitration-should-you-hire-attorney. The article was co-
authored by FINRA staff and The PIABA Foundation and provides
guidance on how to find an attorney, including questions to ask when
screening attorneys. The article also provides cautionary language
about compensated NARs and notes the important role of SACs in
representing customers with small claims.
\113\ FINRA's Securities Helpline for Seniors[supreg] provides a
toll-free number that senior investors can call to get assistance
from FINRA or raise concerns about issues with brokerage accounts
and investments. More information can be found at http://www.finra.org/investors/highlights/finra-securities-helpline-seniors.
---------------------------------------------------------------------------
FINRA is concerned that compensated NARs' interactions with
customers are not subject to regulation like the state disciplinary
rules on lawyer advertising and solicitation,\114\ and that this also
is not an area that FINRA regulates. FINRA is concerned with
allegations that some compensated NARs have misrepresented or willfully
failed to disclose important facts to their clients. For example, FINRA
is aware of compensated NARs who have omitted their disciplinary
history in order to represent clients or assured customers that they
would recover their investments despite almost never doing so.\115\
Compensated NARs' largely unregulated access to potential claimants is
another reason that FINRA believes that it would be appropriate to
disallow compensated NARs from representing parties in arbitrations and
mediations in the DRS forum.
---------------------------------------------------------------------------
\114\ See supra note 17.
\115\ See, e.g., PIABA; Chambliss, supra note 9 and accompanying
text.
---------------------------------------------------------------------------
(C) Comments Supporting Restrictions or Conditions on Representation by
Compensated NARs
In the Notice, FINRA requested comment on alternatives to the rule
proposal that FINRA should consider to reduce the incidence of harmful
activities by compensated NARs while ensuring customers are able to
retain representation. In response, several commenters suggested
restrictions or conditions on the ability of compensated NARs to
represent parties in the DRS forum. Four commenters recommended that
FINRA allow compensated NARs to continue to represent parties in the
DRS forum in smaller or less complicated cases.\116\ Nine commenters
recommended that FINRA exercise some additional form of oversight over
compensated NARs.\117\ These commenters suggested that FINRA could: (1)
train or certify compensated NARs to meet standards, skills or
experience criteria; (2) require compensated NARs to make disclosures
to their clients that are approved by FINRA; (3) require compensated
NARs to adhere to a fiduciary standard; (4) require compensated NARs to
carry insurance; or (5) limit the fees compensated NARs charge clients.
FSI recommended that if FINRA chose this approach, it should provide a
list of qualified compensated NARs on its website or to claimants.
SIFMA, however, stated that FINRA has no current means to measure or
ensure the competency of compensated NARs and it should not put itself
in the business of doing so.\118\ Pace stated that NAR firms should
provide documentation that they are not in violation of state law.
---------------------------------------------------------------------------
\116\ See BFS, Cornell, Sec. Arb. Commentator and Wall.
\117\ See Benade, CSAG, FSI, Georgia, Pace, Sacks, Starr, Wall
and Wood.
\118\ M. Kaplan stated that FINRA has no jurisdiction over NAR
firm conduct.
---------------------------------------------------------------------------
FINRA believes that it would be impractical to create its own
system of training, certifying or otherwise overseeing compensated
NARs.\119\ FINRA further notes that it does not have direct authority
to investigate or discipline compensated NAR conduct.\120\
---------------------------------------------------------------------------
\119\ See supra Item II.B (discussing Alternatives Considered).
\120\ See supra note 19.
---------------------------------------------------------------------------
(D) Commenters Suggesting That FINRA Should Broaden Its Review
In the Notice, FINRA requested comment on the other types of
representation or assistance investors retain in arbitration. In
response, several commenters recommended that FINRA
[[Page 71062]]
conduct additional study on compensated NARs. Cornell commented that
FINRA should differentiate the impact of compensated NARs on
arbitration versus mediation and provide comparable data on the conduct
of attorneys, compensated NARs and SACs in the DRS forum. Sacks
similarly suggested that FINRA provide comparable data on the
performance of attorneys and compensated NARs in representing their
clients in the DRS forum. CSAG stated that FINRA should send
questionnaires to customers that have used the services of compensated
NARs to seek their input and the results of any settlements. Pace
recommended that FINRA's Foundation fund further research into whether
customers fare better when represented by a compensated NAR than when
representing themselves.
As previously noted, FINRA has identified several allegations of
misconduct by compensated NARs and harm to parties from compensated
NARs' unauthorized practice of law. FINRA does not believe that it
would be practical to draw conclusions from the relative performance of
compensated NARs and attorneys at this time. Potential differences in
the characteristics of customer claims and the confidentiality of
settlements makes direct comparisons difficult, as does the low number
of compensated NARs currently practicing in the DRS forum.
(E) Other Comments
In response to the Notice, some commenters recommended that instead
of focusing on compensated NARs, FINRA should focus on preventing or
remediating abuses by brokerage firms and associated persons.\121\ Five
commenters recommended that FINRA focus on the issue of unpaid customer
arbitration awards by requiring brokers to carry insurance or by
creating a restitution fund.\122\ Neuman and Stein criticized the DRS
forum for becoming too expensive and complicated for customers.
---------------------------------------------------------------------------
\121\ See CSAG, Stein and Stout.
\122\ See Byrd, Kabat, Neuman, Pate and Wilson.
---------------------------------------------------------------------------
Although these comments are beyond the scope of the proposed
rulemaking, FINRA notes that it has amended its Membership Application
Program rules to help further address the issue of unpaid arbitration
awards.\123\ FINRA has also expanded a customer's options to withdraw
an arbitration claim if a member or an associated person becomes
inactive before a claim is filed or during a pending arbitration.\124\
In addition, FINRA has adopted rules to address brokers with a
significant history of misconduct and the broker-dealers that employ
them.\125\ FINRA has also adopted new rules to address firms with a
significant history of misconduct.\126\ In addition, to provide further
transparency regarding unpaid awards:
---------------------------------------------------------------------------
\123\ The amendments help prevent a member firm with substantial
arbitration claims from avoiding payment of potential awards or
settlements by shifting its assets to another firm and closing down.
See Securities Exchange Act Release No. 88482 (March 26, 2020), 85
FR 18299 (April 1, 2020) (Order Approving File No. SR-FINRA-2019-
030); Regulatory Notice 20-15 (May 2020) (announcing the effective
date of September 14, 2020 for the amendments discussed in File No.
SR-FINRA-2019-030).
\124\ In addition, the amendments allow customers to amend
pleadings, postpone hearings, request default proceedings and
receive a refund of filing fees in these situations. See Securities
Exchange Act Release No. 88254 (February 20, 2020), 85 FR 11157
(February 26, 2020) (Order Approving File No. SR FINRA-2019-027);
Regulatory Notice 20-11 (April 2020) (announcing the effective date
of June 29, 2020 for the amendments discussed in File No. SR-FINRA-
2019-027).
\125\ See Securities Exchange Act Release No. 90635 (December
10, 2020), 85 FR 81540 (December 16, 2020) (Order Approving File No.
SR-FINRA-2020-011, as Modified by Amendment No. 1); Regulatory
Notice 21-09 (March 2021) (announcing the effective dates of April
15, 2021, May 1, 2021, June 1, 2021 and September 1, 2021 for the
respective amendments approved in File No. SR-FINRA-2020-011); see
also Securities Exchange Act Release No. 92710 (August 19, 2021), 86
FR 47527 (August 25, 2021) (Order Approving File No. SR-FINRA-2021-
011); Securities Exchange Act Release No. 92793 (August 27, 2021),
86 FR 49394 (September 2, 2021) (Notice of Filing and Immediate
Effectiveness of File No. SR-FINRA-2021-020).
\126\ See Securities Exchange Act Release No. 92525 (July 30,
2021), 86 FR 42925 (August 5, 2021) (Order Approving File No. SR-
FINRA-2020-041, as Modified by Amendment Nos. 1 and 2); see also
Securities Exchange Act Release No. 92525 (July 30, 2021), 86 FR
49589 (September 3, 2021) (Order Approving File No. SR-FINRA-2020-
041, as Modified by Amendment Nos. 1 and 2) (Correction); Regulatory
Notice 21-34 (September 2021) (announcing the effective date of
January 1, 2022 for the amendments approved in File No. SR-FINRA-
2020-041); Securities Exchange Act Release No. 95048 (June 6, 2022),
87 FR 35582 (June 10, 2022) (Notice of Filing and Immediate
Effectiveness of File No. SR-FINRA-2022-014); Securities Exchange
Act Release No. 96798 (February 3, 2023), 88 FR 8494 (February 9,
2023) (Order Approving File No. SR-FINRA-2022-015); Regulatory
Notice 23-07 (May 2023) (announcing the effective date of June 1,
2023 for the amendments approved in SR-FINRA-2022-015).
---------------------------------------------------------------------------
FINRA issued a Discussion Paper that identifies possible
measures that could be taken to either enhance the resources to pay
such awards or provide greater incentives to pay such awards.\127\
---------------------------------------------------------------------------
\127\ See Discussion Paper, FINRA Perspectives on Customer
Recovery, https://www.finra.org/sites/default/files/finra_perspectives_on_customer_recovery.pdf.
---------------------------------------------------------------------------
FINRA makes data on unpaid customer arbitration awards for
the past five years available on its website.\128\
---------------------------------------------------------------------------
\128\ See Statistics on Unpaid Customer Awards in FINRA
Arbitration, https://www.finra.org/arbitration-and-mediation/statistics-unpaid-customer-awards-finra-arbitration.
---------------------------------------------------------------------------
FINRA also makes available in one place on its website a
list of firms and individuals responsible for unpaid customer
arbitration awards.\129\
---------------------------------------------------------------------------
\129\ See Member Firms and Associated Persons with Unpaid
Customer Arbitration Awards, https://www.finra.org/arbitration-and-mediation/members-firms-and-associated-persons-unpaid-customer-arbitration-awards. The list includes the names of firms and
individuals whose FINRA registration has been terminated, suspended,
canceled or revoked, or who have been expelled from FINRA. These
firms and individuals are no longer FINRA members or associated with
a FINRA member, but they may be operating in another area of the
financial services industry where FINRA registration is not
required. The list also shows those firms and individuals with
unpaid arbitration awards, but where bankruptcy is a defense to non-
payment. These firms and individuals may still be active in the
brokerage industry due to the bankruptcy defense to non-payment.
---------------------------------------------------------------------------
Thus, FINRA continues to focus on this important issue.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-FINRA-2023-013 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2023-013. This
file number should be included on the subject line if email is used. To
help the
[[Page 71063]]
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Copies of such filing also will be available for inspection and
copying at the principal office of FINRA. Do not include personal
identifiable information in submissions; you should submit only
information that you wish to make available publicly. We may redact in
part or withhold entirely from publication submitted material that is
obscene or subject to copyright protection. All submissions should
refer to File Number SR-FINRA-2023-013 and should be submitted on or
before November 3, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\130\
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\130\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 2023-22612 Filed 10-12-23; 8:45 am]
BILLING CODE 8011-01-P