Notice2024-00856
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change To Amend the FINRA Codes of Arbitration Procedure and Code of Mediation Procedure To Revise and Restate the Qualifications for Representatives in Arbitrations and Mediations
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
January 18, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 12 (Thursday, January 18, 2024)</title>
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[Federal Register Volume 89, Number 12 (Thursday, January 18, 2024)]
[Notices]
[Pages 3481-3485]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-00856]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99335; File No. SR-FINRA-2023-013]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change To Amend the
FINRA Codes of Arbitration Procedure and Code of Mediation Procedure To
Revise and Restate the Qualifications for Representatives in
Arbitrations and Mediations
January 11, 2024.
I. Introduction
On October 5, 2023, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend the FINRA Code of
Arbitration Procedure for Customer Disputes (``Customer Code''), the
Code of Arbitration Procedure for Industry Disputes (``Industry
Code''), and the Code of Mediation Procedure (``Mediation Code'')
(collectively, the ``Codes''), to revise and restate the qualifications
for representatives in arbitrations and mediations in the forum
administered by FINRA Dispute Resolution Services (``DRS'').
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\1\ See 15 U.S.C. 78s(b)(1).
\2\ See 17 CFR 240.19b-4.
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The proposed rule change was published for public comment in the
Federal Register on October 13, 2023.\3\ The public comment period
closed on November 3, 2023. The Commission received comment letters
related to this filing.\4\ On November 9, 2023, FINRA consented to an
extension of the time period in which the Commission must approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to approve or disapprove the proposed
rule change to January 11, 2024.\5\ On January 8, 2024, FINRA responded
to the comment letters received in response to the Notice.\6\ This
order approves the proposed rule change.
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\3\ See Exchange Act Release No. 98703 (Oct. 6, 2023), 88 FR
71051 (Oct. 13, 2023) (File No. SR-FINRA-2023-013) (``Notice'').
\4\ The comment letters are available at <a href="https://www.sec.gov/comments/sr-finra-2023-013/srfinra2023013.htm">https://www.sec.gov/comments/sr-finra-2023-013/srfinra2023013.htm</a>.
\5\ See letter from Kristine Vo, Assistant General Counsel,
FINRA, to Lourdes Gonzalez, Assistant Chief Counsel, Division of
Trading and Markets, Commission, dated November 9, 2023. This letter
is available at <a href="https://www.finra.org/sites/default/files/2023-11/SR-FINRA-2023-013-ExtensionNo1.pdf">https://www.finra.org/sites/default/files/2023-11/SR-FINRA-2023-013-ExtensionNo1.pdf</a>.
\6\ See letter from Kristine Vo, Assistant General Counsel,
Office of General Counsel, FINRA, to Vanessa Countryman, Secretary,
Commission, dated January 8, 2024 (``FINRA Response'').
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II. Description of the Proposed Rule Change
A. Background
The Codes currently permit parties to arbitrations and mediations
in the DRS forum to represent themselves, to be represented by an
attorney at law in good standing, or to be represented by a non-
attorney representative (``NAR'').\7\ Some NARs receive compensation in
connection with their representation of parties (``compensated
NARs'').\8\ Other NARs assist parties with their cases without
compensation (``uncompensated NARs'').\9\ In addition, although the
practice is not specifically addressed by the Codes, law students
sometimes represent parties while practicing under the supervision of
an attorney through securities arbitration clinics (``SACs'').\10\
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\7\ See FINRA Rules 12208, 13208, and 14106.
\8\ Notice at 71051.
\9\ Id.
\10\ Id. at 71051-52.
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[[Page 3482]]
In response to DRS forum users' concerns regarding the conduct of
compensated NARs, FINRA reviewed their representation of parties in
arbitrations and mediations in the DRS forum.\11\ FINRA found that
compensated NARs represent customers in a small percentage (one
percent) of the customer cases in the DRS forum.\12\ Nevertheless,
FINRA identified several allegations of improper conduct by compensated
NARs in connection with their representation of parties in the DRS
forum.\13\ In contrast, FINRA did not identify any allegations of
improper conduct by uncompensated NARs or law students.\14\ FINRA
expressed concern that parties may be harmed when compensated NARs are
found to be engaged in the unauthorized practice of law under the law
of the relevant United States (``U.S.'') jurisdiction.\15\ FINRA
highlighted that compensated NARs have, for example, been enjoined from
continuing their representation of parties during pending arbitrations
after courts determined that the representation constituted the
unauthorized practice of law.\16\ DRS arbitrators have also issued
awards dismissing claims, or finding against investors, after
determining that a compensated NAR's representation of an investor
constituted the unauthorized practice of law in the jurisdiction.\17\
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\11\ Id. at 71052.
\12\ Id. at 71054.
\13\ Id.
\14\ Id.
\15\ Id. at 71053.
\16\ Id.
\17\ Id.
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Moreover, FINRA expressed concern that NARs are not subject to
professional qualification requirements, ethical rules, disciplinary
processes, and client protections that the states and other U.S.
jurisdictions apply to attorneys who represent parties in the DRS
forum.\18\ As such, customers of compensated NARs do not benefit from
the client protections and disciplinary processes that apply to
attorneys and may have limited recourse if they are harmed by the
misconduct of compensated NARs.\19\
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\18\ See id. at n.16 (stating that ``[g]enerally, licensed
attorneys are required to have: (1) completed a bachelor's degree
program (or its equivalent) and a legal education as required by a
licensing state; (2) passed a state bar exam; (3) passed the
Multistate Professional Responsibility Examination; (4) passed a
licensing state's character and fitness review, which includes
questions about academic conduct at law school, criminal history,
social conduct in general and any applicable disciplinary actions;
and (5) taken a [legally] binding oath with a licensing state's
supreme court or high-court equivalent. In addition, many states
require attorneys to complete continuing legal education, including
ethics credits, to maintain a law license. In addition, all
jurisdictions require lawyers to abide by rules of professional
conduct, which are enforced through state disciplinary
processes.'').
\19\ Id. at 71053.
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For the reasons discussed above, FINRA filed the proposed rule
change to revise and restate the qualifications for representatives of
parties using the DRS forum, as described below.\20\
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\20\ FINRA stated that the amendments would be effective for
arbitrations and mediations filed in the DRS forum on or after the
effective date. Notice at 71055.
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B. Proposed Rule Change
FINRA Rules 12208(c), 13208(c), and 14106(c) currently prohibit
compensated and uncompensated NARs from representing parties in
arbitration and mediation if: (1) state law prohibits such
representation; (2) the prospective representative is currently
suspended or barred from the securities industry in any capacity; or
(3) the prospective representative is currently suspended from the
practice of law or disbarred.\21\ FINRA Rules 12208(d), 13208(d), and
14106(d) further provide that issues regarding the qualifications of a
person to represent a party in arbitration or mediation are governed by
applicable law and may be determined by an appropriate court or other
regulatory agency.\22\
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\21\ Notice at 71054.
\22\ Id. As noted above, an arbitrator may also address issues
regarding the qualifications of a person to represent a party in the
DRS forum. See Notice at 71053 n.21 (citing dismissed cases
involving findings that a compensated NAR's representation of an
investor constituted the unauthorized practice of law).
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1. Disallowing Compensated NARs in the DRS Forum
The proposed rule change would prohibit a person who is not an
attorney and who receives compensation in any manner in connection with
the representation (i.e., a compensated NAR) from representing a party
at any stage of an arbitration or mediation proceeding. Specifically,
the proposed rule change would state that any party in an arbitration
or mediation proceeding held in a U.S. hearing location may be
represented by ``a person who is not an attorney, who has not received,
and will not receive, compensation in any manner in connection with the
representation.'' \23\
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\23\ Proposed Rules 12208(b)(1)(C), 13208(b)(1)(C), and
14106(b)(1)(C).
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To help ensure that a NAR is not receiving compensation in
connection with their representation of a party in the DRS forum,
proposed Rules 12208(b)(1)(C), 13208(b)(1)(C), and 14106(b)(1)(C) would
require the NAR and the party being represented to attest that the NAR
is not receiving compensation. Specifically, the proposed rule change
would state that a party could be represented in arbitration or
mediation by an uncompensated NAR, provided that ``prior to the
representation, the person or the party files with the Director through
the Party Portal a written statement, signed by the person and the
party, attesting that the person has not received, and will not
receive, compensation in connection with the representation.'' \24\
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\24\ Proposed Rules 12208(b)(1)(C), 13208(b)(1)(C), and
14106(b)(1)(C). Under the Customer Code and Industry Code, the term
``Director'' means the Director of DRS. See FINRA Rules 12100(m),
12103, 13100(m), and 13103. Under the Mediation Code, the term
``Director'' refers to the Director of Mediation of DRS. See FINRA
Rules 14100(d) and 14103. The Party Portal provides forum users with
a secure, online location for claim filing and interactions relating
to case administration. Parties use the Party Portal to, among other
things, file claims, pay filing fees, receive documents from and
send documents to DRS, receive service of claims, submit answers to
claims, submit additional case documents, view the status of cases,
select arbitrators, schedule hearings and send documents to other
Party Portal case participants. See, e.g., FINRA Rules 12300, 12302,
12402, 12403, 13300, 13302, and 13404. Since mediation is voluntary
in all instances, DRS permits parties to a mediation proceeding to
use the Party Portal on a voluntary basis to submit and view their
mediation case information and documents. See FINRA Rule 14109(b)
and (h); see also Notice at 71054 n.37.
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2. Codifying the Role of Law Students and SACs
The Codes do not specifically address the representation of parties
in the DRS forum by law students supervised by attorneys through
SACs.\25\ The proposed rule change would amend the Codes to codify the
current practice of allowing a party to be represented by an enrolled
law student participating in a law school clinical program or its
equivalent and practicing under the supervision of an attorney.\26\
Specifically, the proposed rule change would state that any party in an
arbitration or mediation proceeding held in a U.S. hearing location may
be represented by ``a student enrolled in a law school participating in
a law school clinical program or its equivalent and practicing under
the supervision of an attorney.'' \27\
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\25\ See Notice at 71051-52.
\26\ See proposed Rules 12208(b)(1)(B), 13208(b)(1)(B), and
14106(b)(1)(B).
\27\ See proposed Rules 12208(b)(1)(B), 13208(b)(1)(B), and
14106(b)(1)(B).
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3. Persons Prohibited From Representing Parties in the DRS Forum
The Codes currently provide that non-attorneys may not represent a
party if state law prohibits such representation, the person is
currently suspended or barred from the securities industry in
[[Page 3483]]
any capacity, or the person is currently suspended from the practice of
law or disbarred.\28\ The proposed rule change would retain the
substance of these provisions, while also stating that the laws of U.S.
jurisdictions that are not states may also disqualify the person from
representing a party.\29\ The proposed rule change would also apply
these prohibitions generally to all persons, including attorneys.\30\
Furthermore, the proposed rule change would specifically preclude a
person who is currently suspended from or denied the privilege of
appearing or practicing before the Commission from representing a party
in the DRS forum.\31\
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\28\ See FINRA Rules 12208(c), 13208(c), and 14106(c).
\29\ See proposed Rules 12208(b)(2)(A), 13208(b)(2)(A), and
14106(b)(2)(A).
\30\ See proposed Rules 12208(b)(2)(C), 13208(b)(2)(C), and
14106(b)(2)(C). The prohibitions would not apply retroactively to
persons who are suspended or barred from the securities industry and
who are representing a party in a proceeding at the time of the
effective date of the proposed rule change. See Notice at 71055
n.50. The proposed rule change would apply to arbitrations and
mediations filed in the DRS forum on or after the effective date and
would preclude such representation going forward. Notice at 71055.
\31\ See proposed Rules 12208(b)(2)(D), 13208(b)(2)(D), and
14106(b)(2)(D). This prohibition would not apply retroactively to
persons who are suspended or denied the privilege of appearing or
practicing before the Commission and who are representing a party in
a proceeding at the time of the effective date of the proposed rule
change. See Notice at 71055 n.51. The proposed rule change would
apply to arbitrations and mediations filed in the DRS forum on or
after the effective date and would preclude representation by such
parties going forward. Notice at 71055.
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Specifically, the proposed rule change would state that no person
may represent a party in an arbitration or mediation proceeding held in
a U.S. hearing location if: ``(A) the laws of a state of the United
States, the District of Columbia, or commonwealth, territory, or
possession of the United States with jurisdiction over the
representation prohibit the representation; (B) the person is currently
suspended or barred from the securities industry in any capacity; (C)
the person is currently suspended from the practice of law or
disbarred; or (D) the person is currently suspended from or denied the
privilege of appearing or practicing before the Securities and Exchange
Commission.'' \32\
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\32\ Proposed Rules 12208(b)(2)(D), 13208(b)(2)(D), and
14106(b)(2)(D).
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4. Determinations of Qualifications of Representatives
The Codes currently provide, in part, that ``[i]ssues regarding the
qualifications of a person to represent a party in arbitration [or
mediation] are governed by applicable law and may be determined by an
appropriate court or other regulatory agency.'' \33\ The Codes also
currently provide that ``[i]n the absence of a court order, the
arbitration [or mediation] proceeding shall not be stayed or otherwise
delayed pending resolution of such issues.'' \34\ To improve the
clarity of these provisions, the proposed rule change would make non-
substantive changes to them.\35\ Specifically, the proposed rule change
would state that ``[a] challenge to the qualifications of a
representative made outside of the [arbitration or mediation]
proceeding shall not stay or otherwise delay the [arbitration or
mediation] proceeding in the absence of a court order.'' \36\
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\33\ FINRA Rules 12208(d) and 13208(d); see FINRA Rule 14106(d).
\34\ FINRA Rules 12208(d) and 13208(d); see FINRA Rule 14106(d).
\35\ Notice at 71055.
\36\ Proposed Rules 12208(d) and 13208(d); see proposed Rule
14106(d).
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III. Discussion and Commission Findings
After careful review of the proposed rule change and the comment
letters, the Commission finds that the proposed rule change is
consistent with the requirements of the Act and the rules and
regulations thereunder that are applicable to a national securities
association.\37\ Specifically, as explained in more detail below, the
Commission finds that the proposed rule change is consistent with
Section 15A(b)(6) of the Act, which requires, among other things, that
FINRA rules be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, and, in
general, to protect investors and the public interest.\38\
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\37\ In approving this rule change, the Commission has
considered the rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\38\ 15 U.S.C. 78o-3(b)(6).
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A. Disallowing Compensated NARs in the DRS Forum
1. General Prohibition
As noted above, FINRA is proposing to amend the Codes to revise and
restate the qualifications for representatives of parties using the DRS
forum to disallow compensated NARs from representing parties in the DRS
forum. FINRA is proposing these rule changes in response to several
allegations of improper conduct by compensated NARs in connection with
their representation of parties in the DRS forum (e.g., compensated
NARs aggressively soliciting customers to bring claims in the DRS
forum).\39\ Specifically, FINRA stated that compensated NARs have a
pecuniary incentive to engage in misconduct when seeking new client
relationships or bringing claims in the DRS forum, and that parties
harmed by such conduct lack recourse against compensated NARs who are
not directly regulated.\40\ Nevertheless, while FINRA acknowledged that
as a result of disallowing compensated NARs, some parties may have
difficulty in obtaining counsel, FINRA stated that the proposed rule
change ``balances the need for parties, including investors, to be able
to avail themselves of representation in the DRS forum with protecting
those parties, the integrity of the DRS forum, and the public interest
generally from the potential harmful conduct and lack of recourse that
may come from representation by compensated NARs.'' \41\
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\39\ See Notice at 71052.
\40\ FINRA also stated that although compensated NARs may be
subject to state laws governing general business practices, they are
not subject to the specific and extensive professional qualification
requirements, ethical rules, disciplinary processes and client
protections that the states and other U.S. jurisdictions apply to
attorneys who represent parties in the DRS forum. Further,
compensated NARs' interactions with customers are not subject to
regulation like the state disciplinary rules on lawyer advertising
and solicitation. See Notice at 71052-53.
\41\ Notice at 71055-56; see also Notice at 71054, 71058. FINRA
acknowledged that for claims of $100,000 or less, an attorney may
believe that their share of a potential award might be too small to
justify the effort, not all investors will qualify for assistance by
SACs, and that investors may ultimately have to represent
themselves. Id.
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Commenters generally supported the proposed rule change.\42\ One
commenter stated that ``it is in the best interest of investors to
disallow compensated [NARs] from representing customer claimants in
FINRA arbitration.'' \43\ A second commenter similarly stated that the
proposed rule change would ``reduce the risk that parties, including
investors, may be significantly harmed by the activities of compensated
[[Page 3484]]
NARs.'' \44\ A third commenter stated that ``NARs have a greater
propensity than attorneys to engage in improper or disruptive
conduct.'' \45\ A fourth commenter agreed with each of FINRA's
concerns, stating that the proposed rule change is ``important and
necessary to protect investors from improper conduct by compensated
[NARs,] . . . who are not governed by the same constraints as licensed
attorneys or law students under the supervision of licensed attorneys.
. . . [A]nd individuals who fall prey to incompetent representation by
a NAR may not have any method of recourse.'' \46\
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\42\ See letters from Steven B. Caruso, dated October 7, 2023
(``Caruso Letter''); Joseph C. Peiffer, President, Public Investors
Advocate Bar, to Vanessa Countryman, Secretary, Commission, dated
November 3, 2023 (``PIABA Letter''); Mark Quinn, Director of
Regulatory Affairs, Cetera Financial Group, to Secretary,
Commission, dated November 3, 2023 (``Cetera Letter''); Christine
Lazaro, Supervising Attorney, Elizabeth Allhusen, Legal Intern,
Camille Perbost, Legal Intern, and Elissa Germaine, Supervising
Attorney, Securities Arbitration Clinic of St. John's University
School of Law, to Vanessa Countryman, Secretary, Commission, dated
November 3, 2023 (``St. John's Letter''); see also letter from Lynne
Brundage, dated January 5, 2024 (describing an experience with the
DRS forum that is outside the scope of the proposed rule change).
\43\ PIABA Letter at 1.
\44\ Caruso Letter at 3.
\45\ Cetera Letter at 2.
\46\ St. John's Letter at 1.
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Compensated NARs represent claimants in a small percentage of the
overall customer cases in the DRS forum but have demonstrated a higher
propensity to engage in improper conduct in connection with their
representation than their counterparts, including uncompensated
NARs.\47\ Similarly, compensated NARs are less likely to be subject to
professional qualification requirements, ethical rules, disciplinary
processes, and client protections than attorneys who represent parties
in the DRS forum.\48\ Further, compensated NARs' interactions with
customers are not subject to regulation like the state disciplinary
rules on lawyer advertising (e.g., failure to disclose disciplinary
history or assuring customers that they would recover investments).\49\
Thus, to the extent compensated NARs aggressively solicit customers to
bring claims in the DRS forum, pursue frivolous claims, charge clients
non-refundable fees, or engage in additional misconduct, including the
unauthorized practice of law, customers generally would not have
recourse that would be available had they engaged an attorney.\50\ By
prohibiting compensated NARs from representing parties in the DRS
forum, the proposed rule change removes the participation of
individuals who have a financial incentive to engage in improper
conduct in connection with their representation of parties in the DRS
forum. As such, excluding compensated NARs from the DRS forum is a
reasonable approach to help ensure that persons representing claimants
in the DRS forum for compensation adhere to professional standards and
can be held to account when they do not (e.g., attorneys) or lack the
pecuniary incentive to engage in improper conduct (e.g., uncompensated
NARs).
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\47\ See supra notes 12-13.
\48\ See supra note 18.
\49\ See supra note 40 and Notice at 71061.
\50\ See Notice at 71052-53.
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The Commission recognizes that some claimants with smaller claims
who might have otherwise considered representation by a compensated NAR
may have more difficulty obtaining representation as a result of the
proposed rule change. Similarly, claimants with smaller claims may
incur additional costs to retain an attorney or risk worse outcomes by
representing themselves at a hearing. However, these concerns are
outweighed by the threat of harm, including harm to investors,
presented by compensated NARs whose interactions with customers are not
subject to professional standards of conduct. Furthermore, because
compensated NARs represent only a small percentage (one percent) of
parties in the DRS forum, the potential impact of the proposed rule
change on representation within the DRS forum may be limited and is
thus a reasonable way for FINRA to prevent potential harms caused by
compensated NARs without unduly impacting representation within the DRS
forum.
2. Statement of No Compensation for Uncompensated NAR Representation
As noted above, the proposed rule change provides that a party
could be represented in arbitration or mediation by an uncompensated
NAR, provided that prior to the representation, the uncompensated NAR
or party files the required written attestation with the Director of
DRS. Commenters generally supported the proposed rule change.\51\
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\51\ See Caruso Letter, PIABA Letter, Cetera Letter, and St.
Johns Letter.
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The proposed rule change requiring a written attestation that a NAR
has not received and will not receive compensation in connection with
its representation of a party is a reasonable obligation that would
permit FINRA to verify that the NAR is uncompensated and help to ensure
that all parties are aware of this requirement, thus supporting the
regulatory goal of excluding compensated NARs from the DRS forum. For
these reasons, the proposed rule change is reasonable.
B. Codifying the Role of Law Students and SACs
As noted above, FINRA stated that it is proposing to amend the
Codes to codify the current practice whereby a party may be represented
by a student enrolled in a law school participating in a law school
clinical program or its equivalent and practicing under the supervision
of an attorney. FINRA stated that SACs and the law students who
participate in these programs provide an inexpensive option for
customers who qualify and may not be able to find or afford an
attorney. Moreover, these representations may be regulated by state
rules that govern the performance of legal services by law students and
the attorneys who supervise them.\52\ Accordingly, FINRA stated that it
would be appropriate to codify the role of law students in providing
representation to investors through SACs.\53\
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\52\ See Notice at 71055.
\53\ Id.
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Commenters generally supported the proposed rule change.\54\ One of
these commenters stated that for a clinic that provides pro bono
representation to investors who otherwise are unable to find an
attorney due to the size of their claims or the uncertainty of
collectability, ``it is critical that law school students in clinic
programs remain able to represent customers in the DRS forum to fill
the access to justice gap with ethical representation for investors who
cannot otherwise afford it.'' \55\ Similarly, a second commenter stated
that it supports the proposed rule change ``because it benefits both
the parties and the system by helping to assure that parties have
access to expertise that they may lack or cannot afford to pay for.''
\56\ In order to improve parties' access to representation in the DRS
forum, this commenter recommended that FINRA study what it means to be
the ``equivalent'' to a law school clinic within the meaning of the
proposed rule change. Specifically, the commenter suggested that FINRA
(1) determine if such institutions exist and, if they do, (2)(a)
consider what qualifications or restrictions may be necessary to allow
them to represent parties in the DRS forum and (b) consider and publish
standards for programs that would satisfy the ``or equivalent''
provision in proposed Rule 12208(b)(1)(B).\57\ In response, FINRA
stated that it included the ``or equivalent'' provision in the proposed
rule change ``to account for flexibility in law school programs (e.g.,
a law school without a formal clinical program, but that has students
[[Page 3485]]
providing legal services under the supervision of a law school
professor).'' \58\ Further, while FINRA is not aware of any such
programs at this time, should one arise, FINRA would ``make an
evaluation on a case-by-case basis and provide guidance as
appropriate.'' \59\
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\54\ See Caruso Letter, PIABA Letter, Cetera Letter, and St.
Johns Letter.
\55\ St John's Letter at 2.
\56\ See Cetera Letter at 2; see also Caruso Letter (stating
that the Commission should approve the proposed rule change
codifying the current practice governing SACs on an expedited
basis).
\57\ See Cetera Letter at 2-3. While the proposed rule change
does not identify programs that are ``equivalent'' to a law school
clinic at this time, it leaves open the opportunity to capture such
a program if one were to come forward.
\58\ FINRA Response at 2.
\59\ Id.
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Currently, a party in arbitration or mediation may be represented
by a student enrolled in a law school participating in a law school
clinical program or its equivalent and practicing under the supervision
of an attorney. This practice, however, is not currently codified in
the FINRA rulebook. Accordingly, parties may not be aware that this
option is available when they are seeking representation. The proposed
rule change should help make customers seeking to use the forum aware
of this alternative option for representation. Similarly, it should
also provide clarity to law school students and the attorneys that
supervise them. Law school clinical programs lack the pecuniary
incentive to engage in the conflicted conduct described above and are
under the supervision of attorneys, thus helping to ensure that a
customer's representative is subject to professional standards of
conduct. As such, the proposed rule change reasonably balances the
needs of customers who might otherwise be unable to obtain legal
representation with protecting parties from the conflicts associated
with compensated NARs.
C. Persons Prohibited From Representing Parties in the DRS Forum
As noted above, the Codes currently provide that non-attorneys may
not represent a party if state law prohibits such representation, 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.\60\ The proposed rule change is retaining the
substance of the current provisions but would expand the scope of the
rule in three ways.
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\60\ See FINRA Rules 12208(c), 13208(c), and 14106(c).
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First, the proposed rule change would add that the laws of U.S.
jurisdictions that are not states (i.e., the District of Columbia, or a
commonwealth, territory, or possession of the United States) may also
disqualify the person from representing a party.\61\ FINRA stated that
the current rule's prohibition on representing a party if state law
prohibits the representation does not fully address FINRA's concerns
with the unauthorized practice of law by compensated NARs because it is
not always clear in advance of the arbitration or mediation whether a
compensated NAR's representation of a party in arbitration or mediation
in a particular jurisdiction is legally permissible. As such,
incorporating this new, broader standard into the proposed rule change
would help protect the integrity and quality of the DRS forum and
protect investors by incorporating the disqualification provisions of
all relevant jurisdictions.\62\
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\61\ Notice at 71055.
\62\ Id. at 71055.
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Second, the proposed rule change would prohibit all persons, not
just non-attorneys, from practicing in the DRS forum who meet the
aforementioned conditions.\63\ FINRA stated that all persons, including
attorneys, should be prohibited from practicing in the DRS forum if
these conditions apply.\64\
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\63\ Id.
\64\ Id.
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Third, the proposed rule change would preclude a person who is
currently suspended from, or denied the privilege of, appearing or
practicing before the Commission from representing a party in the DRS
forum.\65\ As with the above changes, FINRA stated that incorporating
this standard into the proposed rule change would help protect the
integrity and quality of the DRS forum and protect investors.\66\
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\65\ See proposed Rules 12208(b)(2)(D), 13208(b)(2)(D), and
14106(b)(2)(D). FINRA stated that this prohibition would not apply
retroactively to persons who were suspended or denied the privilege
of appearing or practicing before the Commission prior to the
effective date of the proposed rule change. See Notice at 71055
n.51.
\66\ Notice at 71055.
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Commenters generally supported the proposed rule change.\67\
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\67\ See Caruso Letter, PIABA Letter, Cetera Letter, and St.
Johns Letter.
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The proposed rule change's expansion of the categories of persons
prohibited from representing parties in the DRS forum are reasonable to
help prohibit problematic representatives from appearing in the DRS
forum. Specifically, expanding the rule to provide that the laws of any
U.S. jurisdiction, and not only states, may disqualify the person from
representing a party helps ensure that persons in all relevant
jurisdictions are covered by the rules' prohibitions. Similarly,
expanding the prohibitions to apply to all persons, not just attorneys,
helps ensure that any person with a demonstrated track record of
misconduct would be precluded from representing parties in the DRS
forum. Further, precluding a person who is currently suspended from, or
denied the privilege of, appearing or practicing before the Commission
from representing a party in the DRS forum precludes another group of
persons with a demonstrated track record of misconduct from
representing parties in the DRS forum. By excluding problematic
representatives from, and at the beginning of, the DRS process, the
proposed change is a reasonable way to help enhance the integrity of
those individuals representing parties in the DRS forum.
D. Determinations of Qualifications of Representatives
As noted above, the proposed rule change would make some clarifying
changes to the current provision that prevents delay of a proceeding
while a challenge to the qualifications of a person to represent a
party is resolved outside of the DRS forum. Specifically, the proposed
rule change would simplify the Codes' language to state that a
challenge to the qualifications of a representative made outside of the
arbitration proceeding shall not stay or otherwise delay the proceeding
in the absence of a court order. Commenters generally supported the
proposed rule change.\68\ The proposed change makes no substantive
changes to the rule, and reasonably clarifies the language regarding
challenges outside of the DRS forum that could affect the progression
of an active proceeding.
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\68\ See Caruso Letter, PIABA Letter, Cetera Letter, and St.
Johns Letter.
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IV. Conclusion
For the reasons set forth above, the Commission finds that the
proposed rule change is consistent with Section 15A(b)(6) of the Act,
which requires, among other things, that FINRA rules be designed to
prevent fraudulent and manipulative acts and practices, promote just
and equitable principles of trade, and, in general, protect investors
and the public interest.\69\
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\69\ 15 U.S.C. 78o-3(b)(6).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\70\ that the proposal (SR-FINRA-2023-013), be and hereby is approved.
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\70\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\71\
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\71\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-00856 Filed 1-17-24; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on January 18, 2024.
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