The Financial Industry Regulatory Authority (FINRA) recently proposed a change to Rule 12104 of the Code of Arbitration Procedure for Customer Disputes, which would allow Arbitrators to refer cases to FINRA Enforcement for disciplinary investigation during an arbitration proceeding.
Under current FINRA rules, arbitrators may only refer a case to them for a disciplinary investigation at the conclusion of an arbitration hearing. The proposal for mid-case referrals was made in order to help them detect and minimize fraudulent activity as early as possible and obtain evidence before it is lost.
Specifically, the rule would allow arbitrators to refer a case for investigation “during the prehearing, discovery, or hearing phase of a case, which the arbitrator has reason to believe poses a serious, ongoing, imminent threat to investors that requires immediate action.” Based upon a reading of the proposed rule, if a FINRA arbitrator becomes aware of evidence or other information they deem “poses a serious, ongoing, imminent threat to investors”, they would have the ability to refer the case immediately to FINRA’s Enforcement division during the hearing.
The rule provides that parties will be notified of any mid-case referral and that they would then have 10 days to request the panel withdraw from the case. If such a request is made, the panel must withdraw. As a result, the case would proceed with a new panel selected by the parties under FINRA rules.
If this rule passes, it would be extremely helpful to investors and would likely deter stockbrokers and brokerage firms from taking cases to hearing. The vast majority of FINRA actions stem from violations of FINRA’s Conduct Rules. As such, these actions would be appropriate for FINRA Enforcement investigations. Stockbrokers and brokerage firms must be aware that if they decide to test their luck at an arbitration hearing, they now run the risk of a FINRA investigation in addition to an award in the customer’s favor.