FINRA recently passed an amendment to the Code of Arbitration Procedure which provides that arbitrators no longer have to wait until the end of a case to make a disciplinary referral. Now, panelists are free to make such a referral in the middle of a hearing!
My first observation is: was there really a need for this new rule? Was there a clamor among arbitrators who felt their hands were unduly tied by having to wait for the end of a hearing to make a disciplinary referral? I am still a bit confounded by the impetus for this new rule. After all, the overwhelming majority of hearings last a few days, a week at most. And, these hearings occur years after the conduct actually took place that is the subject of the arbitration. So, under the old rule, if a panel heard something so troubling at the hearing that it felt compelled to make a disciplinary referral, it would have to wait, at most, a few days before it could do so. How many things are so horrific that it would be an affront to justice for a panel not to make an immediate disciplinary referral, years after the actual misconduct? Are there any?
Also, remember that every Statement of Claim is reviewed by FINRA Member Regulation at the time it is filed. If there is something disclosed in the SOC that is so bad that it presents an immediate threat to investors or to the integrity of the market, FINRA already has the opportunity to open an investigation promptly; it does not have to wait for a disciplinary referral from the panel.
Thus, the protection this rule provides is a bit illusory, both in terms of the temporal aspect (given how very few matters couldn’t wait a couple more days, until the end of the hearing, to become the subject of a disciplinary referral) and the duplicative aspect (as the allegations in the SOC are already reviewed).
The most troubling issue, however, is that it makes a mockery of the supposed fairness of the arbitration process. As in court, a claimant who files a Statement of Claim has the burden of proof. The respondent is presumed innocent. To try to meet his burden, the claimant introduces evidence. At the close of the claimant’s case, the respondent is given the opportunity to put on his own evidence, in his defense. Arbitrators are trained not to deliberate, not to reach any conclusions as to possible liability, until all the evidence has been heard. This new rule, however, basically encourages arbitrators to make decisions before all the evidence has been heard. How can an arbitrator state with a straight face that even though he elected to make a disciplinary referral after hearing only the claimant’s evidence – and before hearing the respondent’s evidence – that he or she will not reach any conclusions about liability until the end of the case? It simply cannot happen.
And while respondents are expressly invited by the new rule to seek to recuse a panelist who makes a mid-case referral to Enforcement, there is hardly a guarantee that such a request will be granted. As with “ordinary” requests for recusal, the decision is made by the panelist, not by the Director of Dispute Resolution. Historically, most panelists resist recusal requests despite repeated admonitions from FINRA always to err on the side of conflict avoidance. Moreover, if the referral comes in the middle of a hearing, by the time the respondent learns about it, makes the recusal motion, and gets a decision on the request, the hearing may very well have already concluded.
It sure seems like the new rule creates many more problems than it could ever have been planned to resolve.