FINRA PROPOSES RULE TO PROTECT INVESTORS FROM ARBITRATION EXPLOITATION
FINRA has requested the Securities and Exchange Commission (SEC) approve a policy that would forbid so called non-attorney representatives (NARs) from taking clients cases for compensation. This is to further strengthen the rules regulating Client representation in its private arbitration forums.
The move follows pressure from investor advocates insisting on a reform. Sanctioned brokers who had been banned from the financial services industry, including some with criminal pasts, have still been representing investors for years, according to a study by the Public Investors Arbitration. Investors may represent themselves and are also represented by non-attorneys, whom mostly have been taking advantage of investors. FINRA deserves credit for seeking to have them banned.
Cleaning up Non-Attorney Representatives in FINRA Arbitration
The proposed rule change also follows a Financial Planning investigation into the matter. FINRA sent the proposal to SEC last month following its regular board meeting.
"It's a really good development and something that needed to be done," opined Andrew Stoltmann, co-author of the PIABA study. FINRA itself declined to give an official comment/statement on the proposed ruled.
Some NARs have made a practice of aggressively marketing themselves to investors and charging them high fees both upfront and as a percentage of any recovered losses, according to the PIABA study and Financial Planning's investigation.
While attorneys are subject to stringent ethical and professional requirements, non-attorney representatives can operate more freely, for example, by cold-calling clients, a practice forbidden for attorneys.
Ex-Brokers Build Second Career As Non-Attorney Representatives
Some ex-brokers with long disciplinary histories have built second careers taking cases at lower rates than lawyers charge. Although FINRA has explicitly forbidden banned brokers from representing investors for some time, at least one continues to handle high caseloads, and others offer their services through proxies, the PIABA study found. The rule change would effectively close loopholes and prevent brokers who ran afoul of securities regulations from taking investor cases by making them ineligible to serve in that capacity if they are not attorneys.
For some time, "we've been hearing horror stories about some investors paying $20,000 nonrefundable retainers just to have somebody review their case," study coauthor Neuman says. "And then those people, who already paid the retainers, either get represented by the NAR or get farmed out to an attorney who handled the case."
Neuman predicts it still could take up to a year for the SEC to approve the rule and perhaps longer for its implementation. Still, given the longstanding nature of the problem, he opines FINRA acted decisively in response to concerns about the issue.
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