| June 12
June 12 Wall Street's industry-funded watchdog
is optimistic that its plan to let securities arbitrators
immediately report frauds they learn about in the middle of a
case will finally take effect.
"I feel comfortable that the rule is likely to go forward,"
Linda Fienberg, the Financial Industry Regulatory Authority's
arbitration head, told reporters in New York on Wednesday. The
watchdog runs its own arbitration system, which is used by
brokerages and investors to resolve legal disputes.
The U.S. Securities and Exchange Commission is now taking a
close look at the rule FINRA wants to impose, the most recent
development in a four-year process. The rule, if approved, would
let arbitrators stop in the middle of a case to tell FINRA's
staff about possible frauds they learn of that could hurt the
FINRA's staff would then decide whether its enforcement unit
or the SEC should investigate the problem. Arbitrators must now
wait until a case ends to air concerns.
The proposal dates to 2010, sparked by multibillion-dollar
Ponzi schemes orchestrated by Bernard Madoff and R. Allen
But it is not without controversy.
Lawyers for brokerages and investors worry how FINRA would
handle arbitrators who report suspicious behavior. Arbitrators
who continue in a case after referring concerns to FINRA, the
lawyers say, may show bias against certain parties because they
already may have come to conclusions before hearing all the
evidence. That could make it easier for one party to later
challenge a ruling.
Getting a replacement arbitrator up to speed also might
prolong a case and increase legal costs.
Making arbitrators wait until the end of a case could allow
massive frauds to operate for months to more than a year without
intervention, Fienberg said on Wednesday. They should be able to
speak up immediately, Fienberg said. The new authority, if
approved, would apply only in situations where many investors
are at risk.
FINRA has tweaked the plan in response to the concerns. It
resubmitted a revised version to the SEC in February.
Fienberg says he believes that arbitrators would rarely use
their mid-case referral authority, given that frauds such as the
one perpetrated by Madoff and Stanford Ponzi are rare.
But those situations would be more devastating if they
become evident and arbitrators must remain quiet for months,
Fienberg said. "That's not a happy prospect for regulators to
have that information in its files," Fienberg said.
The SEC must review all changes to FINRA rules, but its
procedure for this proposal is more involved than usual,
according to George Friedman, an arbitration consultant and
former director of FINRA's arbitration unit.
Agency staff will typically approve a new rule after
collecting written views from the public and asking FINRA to
respond, according to Friedman. But this time, the agency itself
has concerns about the proposal that it wants to address,
Friedman said. Among them: that the plan protects investors, the
SEC wrote in a notice on May 20.
The SEC can ultimately reject the plan. Its comment period
for the proposed rule ends on June 26.
(Reporting by Suzanne Barlyn; Editing by Tim McLaughlin and