FINRA vs. the NARs- Round 3; Same Old Nonsense


A simple question: If a “bad” stockbroker rips you off, can a “bad” lawyer help you recover your losses? The answer should be obvious; but for some people, especially some lawyers, it is not.

For the third time in the last 20 years FINRA has asked the SEC to allow it to restrict an aggrieved customer’s right to have the representative of their choice at FINRA sponsored arbitration.  The previous two attempts were dead on arrival because there was no compelling reason to enact that limitation. The same is true this time. Let’s hope that the Commission staff is not asleep.

The issue is whether or not you must be an attorney to represent a party in a non-judicial arbitration proceeding. There have always been non-attorneys (NARs) representing parties in securities industry arbitration. Member firms would often send branch office managers into arbitration to collect a margin debt from a recalcitrant customer or to defend against a customer claim. Non-attorney representatives in securities arbitration was never an issue until the lawyers realized that they could make a lot of money for a lot less effort than they would put into resolving the same disputes in Court.

In the early 1990s, as real estate took a dip in various parts of the country and the value of real estate backed securities fell, a lot of people who were promised appreciation and steady income from these investments wanted their money back.  It was shown that Prudential Securities and other firms had sold billions of dollars’ worth of questionable real estate backed securities to 10s of thousands of investors around the US. 

The number of arbitration claims skyrocketed.  A lot of attorneys and others saw an opportunity to represent these investors on a contingency basis and an industry of customer representatives, both lawyers and non-lawyers was born. 

As these claims wound their way through the arbitration system the number of new claims began to slow down.  Appalled that they might make less money because there were fewer claims to file, the lawyers started a turf war with the NARs, seeking to get the latter barred for an ever-changing number of reasons.

At that time, the vast bulk of labor arbitrations around the country were being handled by shop stewards because they knew the shop floor rules.  Other state and federal government agencies permitted non-attorney representation in their arbitration forums. The trend was to leave the courtrooms to the attorneys and view arbitration as an alternative system where disputes could be resolved quickly and efficiently with or without lawyers.

Notwithstanding, the lawyers claimed that by representing customers in an alternative dispute resolution system, the non-attorney representatives were engaged in the un-authorized practice of law.  This was absurd on its face, especially since they did not think that true if a non-lawyer represented a member firm.

Admission to practice law is governed state by state.  Out of state lawyers need permission to appear in local courts and then usually with a local lawyer beside them. The same lawyers who claim that you must be a lawyer to represent a party in FINRA arbitration do not seem to care if you are not a lawyer in the state where the customer lives or where the arbitration is being held.  There are many lawyers who specialize in securities arbitration who are admitted in one or two states, but who have a national practice.  If NARs are practicing law in states where they are not admitted to practice law then so are these lawyers.

The lawyers also know that the large wirehouses often send inhouse lawyers to defend these claims and the wirehouses do not have lawyers licensed in every state on staff.  So not being admitted to practice law in the state where the customer resides has never been an issue to either the customers’ lawyers or the industry, unless they are referring to NARs.

The current iteration of the proposed rule allows non-attorneys to continue to represent customers in smaller cases. That is like saying: okay, you can be a little pregnant, because it is not the un-authorized practice of law if you only handle the smaller claims. The “unauthorized practice of law” argument, which never made any sense in the first place, seems dead.

Because of the continuing complaints by lawyers, in 1994 the NASD commissioned a study of its arbitration system chaired by former SEC Chair David Ruder. The report specifically looked at non-attorney representatives and left them in place. It called for more study on the subject and called the complaints against the non-attorney representatives “anecdotal”.  The actual complaints against the non-attorneys were never disclosed and more than one person at the time questioned if those “anecdotal complaints” had any substance.

The Ruder Commission Report did express its concern that “the increasingly litigious nature of securities arbitration has gradually eroded the advantages of SRO arbitration.”  FINRA has always advertised arbitration as a quick, inexpensive way to resolve a dispute with your stockbroker.  When I started doing arbitrations in the 1970s, a dispute could usually be resolved with one day of testimony or less. Now they often take weeks because lawyers have complicated a system that should be easy.   

There was another study and a similar request to limit NARs in 2007. The SEC staff asked FINRA to withdraw that request because the Commission staff thought it not in the customers’ best interest.  That reality has not changed.  

Over the years there were a lots of problems in the arbitration system specifically caused by lawyers. After the “tech wreck” claims went through the system in the early 2000s a significant number of the member firms were sanctioned for repeated violations of the arbitration rules specifically because they intentionally hid documents that the customers sought. Several of the member firms were fined $250,000 and FINRA noted that the practice of hiding documents occurred in multiple claims. 

In virtually every claim where a FINRA firm had been sanctioned for discovery violations the firm had been represented by an attorney. It was attorneys who time and again stood before different panels of arbitrators stating, falsely, that their client had no more documents to produce.  Were any of these lawyers sanctioned for lying to arbitrators? (No). Were any attorneys barred from representing parties again? (No.) Are the “anecdotal” problems with NARs worse than this? (Not by a long shot.)

I think that the SEC staff would be appalled to read the pleadings and briefs that a lot of attorneys present to FINRA arbitrators. Many will cite case law that is not applicable and often out of context. FINRA does not provide arbitrators with law clerks or even a law library. Briefing can be a useless exercise that often obfuscates more than it clarifies.    

Arbitrators are fact finders, not judges. They should examine the actions and utterances of the brokers and compare them to industry rules and regulations.  In many claims the panel is examining a transaction that began with an order to purchase a particular security.  In industry parlance, the question that the arbitrators consider is often the same: is this a “good” order? Did the order comply with the industry rules? Was the broker correct in submitting this order and was the supervisor correct in approving the order for execution?

Industry rules can be nuanced and complex. But every day, in every brokerage office, managers, supervisors and compliance personnel review and approve orders written by stockbrokers and ask and answer that question.  If you have a dispute with your broker because you believe your broker broke those rules, why should you not be allowed to be represented by a retired branch office manager or someone else who has worked with those rules and who can explain them to a panel of arbitrators better than most lawyers?  

It is comical that anyone would think that just because you went to law school you can competently represent a party in securities arbitration.  I have lectured at one of the law school securities arbitration clinics.  Students get taught the arbitration procedures but not what they need to know about the investments or the transactions that are at issue.   

Over the years I worked with a number of attorneys who represented public customers and with several of the large and small NAR firms. The simple truth is that you either know how the securities industry works or you don’t.The best arbitration lawyers often started their careers in house at one of the large brokerage firms where they learned how the firms operate and why.  

Over the years NARs have successfully handled thousands of claims. If the NARS were so bad you would think that there would be stacks and stacks of complaints from their clients about them but there aren’t.

I know that there are arbitrators and industry lawyers who have referred their family and friends to NARs. I know that there are professional traders, fiduciaries, sophisticated investors, lawyers and government officials who have sought out and hired NARs to represent them at FINRA arbitration. They do so specifically because the NARs understand how the rules are actually applied and how firms and brokers are supposed to act.

The lawyers’ current beef with NARs is that the NARs charge investors too much which is a sick joke coming from lawyers. No one really knows what NARs charge because no one asked.  And I suspect that the lawyers would object to disclosing their fees for a meaningful comparison.

When the Ruder Report came out suggesting further study of the NARs, there was some hope that the research would tell the investors what they really wanted to know: which representatives get the best results for their clients. That never happened.

FINRA could break down that data so that consumers might also see which representatives have handled more claims involving annuities or options and what percentage of the amount of the claim was actually returned to the investors through awards or settlements.  We live in a time of almost too much data. Why not collect the data and let the consumers decide?

This issue has come up again because the rising market has substantially reduced the number of claims that are being filed. There were over 10,000 claims being filed in the years after the 2008-2009 crash. I expect the number of claims filed in 2018 will be closer to 4000.  That is the only reason that anyone is talking about banning NARs from arbitration, again. The lawyers do not want any more competition.

I do know that this time out,several of the NARs are thinking about litigating any restrictions that the SEC approves.  That should provide fodder for a lot more articles going forward.

Leave a Reply