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Analysis of Comments on FINRA ODR Reg Notice 17-34 on Non-Attorney Reps
Posted on Categories FINRA Code of Arbitration, News, Representation Issues, RulemakingTags , , ,

The comment period closed December 18th on the FINRA Office of Dispute Resolution’s (“ODR”) Regulatory Notice seeking comments on non-attorney representatives (“NAR”). With about 60 comments filed, a majority favor banning or restricting continued NAR use.

As reported in SAAs 2017-48, -46, -41, -40, and -39, FINRA solicited public comments on Regulatory Notice 17-34FINRA Requests Comment on the Efficacy of Allowing Compensated Non-Attorneys to Represent Parties in Arbitration (see also FINRA’s October 18th Press Release). Fifty-nine comments were listed on FINRA’s Website as we went to press. We will not attempt here a comprehensive analysis; that’s a daunting task we leave to the folks at ODR. Suffice it to say there were many passionate views on both sides of the issue. Instead, we present below a summary of representative institutional comments and a few individual ones.

A Recap

Code of Arbitration Procedure Rule 12208(c) provides: “Representation by Others:  Parties may be represented in an arbitration by a person who is not an attorney, unless: state law prohibits such representation; or 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.” Regulatory Notice17-34 advised that FINRA was conducting a review of “the efficacy of continuing to allow such representation” and specifically sought constituent input “with respect to the efficacy of allowing NAR firms to continue to represent clients in the forum.”


More than half of those commenting – arbitrators, mediators, and constituents on both sides of the aisle – urged FINRA to amend the Code of Arbitration Procedure to bar outright NAR use, with the narrow exception of family members or law school securities arbitration clinics. In one of those rare “lion laying down with the lamb” occurrences (ed: we’re not saying who’s who), both SIFMA and PIABA take this position. As reported in SAA 2017-48, PIABA on December 18th conducted a brief telephone conference call on NAR, announcing the release of a new Report, A Menace to Investors: Non-Attorney Representatives in FINRA Arbitration. As described in a Press Release issued in advance of the call, the Report raises “serious concerns about FINRA’s allowance of NARs and the sometimes severe consequences that are suffered at their hands by unwary investors.” The Illinois Bar Association’s Unauthorized Practice of Law Task Force and its Business and Securities Law Council both note that Illinois views representing parties in arbitration the practice of law, as described in Professional Conduct Advisory Opinion No. 13-03 (January 2013), which involved a FINRA arbitration. Securities Arbitration Commentator President Richard Ryder submitted a letter enclosing a feature article published March 2017, that was cited with favor by other commenters. Said Mr. Ryder, “Authors Aegis Frumento and Stephanie Korenman provide recommendations at the end of their article, which I also commend to the Authority. I find particularly incisive the law-of-the-shop and the law-of-the-land distinction the authors draw. I think, too, it will be essential to distinguish specifically the non-attorneys from the Securities Arbitration Clinics in any rulemaking on this subject.”

Allow NAR, but…

About 20 commenters urged that the current FINRA Rule be maintained, although 15 letters were from individual clients of Cold Spring Advisory Group, one of the NAR singled out in the PIABA Report. The main theme of the supporters was that NAR fill a void for investors who cannot find counsel or a clinic to take on a smaller case. Not surprisingly, the NAR filing comments urged that FINRA not bar their continued use (see for example the comment letters submitted by Cold Spring and Richard Sacks.) Some commenters recommend that if NAR use is continued, the Code be changed to require full disclosure of disciplinary histories. For example, the letter submitted by the Georgia State College of Law’s clinic offering these protective measures: “Such steps might include a required disclosure about how a NAR differs from an attorney. NARs could be required to adhere to a fiduciary standard or carry insurance to protect against negligence or other malfeasance. NAR fees could be capped at a reasonable amount or they could be permitted to appear in the FINRA forum only if they did not charge for their services.” Speaking of the clinics, the Cornell clinic suggested that, if FINRA intends to bar NAR use, it should carve out clinics and cases involving less than $100,000. Two former chairs of the Texas Supreme Court’s Unauthorized Practice of Law Committee made a similar suggestion about dollar limits.

The Investor’s Quandary

Some commenters pointed out that investors with modest claims may have difficulty finding an attorney or clinic willing to take the case, and would thus face a quandary: represent themselves or go with a NAR? We found the Financial Services Institute’s approach to be creative and thoughtful. FSI first identifies the problem: “Often, the question facing investors is not whether to elect a higher cost attorney over a lower cost NAR. Instead, in the absence of an available legal clinic or familial representation, the issue is whether the investor should hire an attorney versus representing himself. An investor who represents himself is unlikely to understand the legal issues presented in the case or have the skill to navigate the legal process. Conversely, a NAR that has experience representing clients in FINRA forums may be able to better navigate the process” (footnotes omitted). How, then, to protect the investor? FSI suggests an array of safeguards, such as requiring the NAR to: 1) to pass a basic skill examination; 2) possess minimum educational and experiential credentials; 3) recertify annually; 4) undergo background checks; and 5) maintain professional liability insurance. FINRA would maintain a publicly-available list of NAR meeting these standards.

Need for More Research

Some commenters suggest that more research is needed. For example, the John Jay Clinic concludes that, “Based on the Regulatory Notice and the majority of the comments filed thus far, it appears that NAR firms provide more harm than good to investors and to the forum (though we acknowledge the submission of comments noting some success stories with NAR firms). [We] encourage further research, possibly funded by the FINRA Investor Education Foundation, into whether investors fare better when represented by a NAR firm than when representing themselves pro se.” The Cornell clinic also suggested that more research was needed, as did several of those supporting continued NAR use.

What’s Next?

If past is prologue, staff will analyze the comments and then discuss with the National Arbitration Committee possible Code and procedural changes. Thereafter, its off to the Board and ultimately the SEC. If FINRA is directed inwardly on this and focused on eradicating an image problem, then an outright ban will be proposed. On the other hand FINRA might react to the mix of comments and take a hybrid approach short of an outright ban of compensated NAR, perhaps carving out family members and clinics and allowing continued NAR use in smaller cases (but requiring greater disclosure).

(ed: *We will of course track this one. **We agree with those commenters expressing concerns about investors with smaller claims who cannot find an attorney or clinic willing to take the case. Are they really better off pro se? ***We will cover in SAA 2018-02 the comments on Regulatory Notice 17-33 on unpaid Awards.) (SAC Ref. No. 2018-01-01)

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