AdvisorHub (October 9, 2023) - The Financial Industry Regulatory Authority has proposed a new rule barring non-lawyers who receive compensation from representing parties in its arbitration forum.
Finra, which has been studying the issue since 2014, sent its proposal on Thursday to the Securities and Exchange Commission, which must approve it prior to it taking effect. The proposal received support from the Public Investors Advocate Bar Association trade group representing plaintiff lawyers.
“The rule is a long time coming, and a great step forward in protecting investors,” said PIABA president Hugh D. Berkson, whose organization issued a report in 2017 calling for the ban. “Investors, who have been victimized by unscrupulous financial advisors, should not face the prospect of being victimized again by unscrupulous [compensated non-attorneys].”
Finra made a distinction between compensated and uncompensated non-lawyers representing investors. The industry’s self-regulatory organization said under the proposed rule, it would allow some who are training to be lawyers, specifically, “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,” to represent investors in the forum. It would also allow anyone who wasn’t making money for representing them—friends and family members—to continue representing investors.
Prior to making the proposal, Finra conducted a review in response to concerns raised by users of the arbitration and mediation forum, it said.
Paid non-lawyers represent only 1% of investors using the forum, Finra said. They often have backgrounds “in the securities industry and primarily represent individuals in arbitration or mediation claims against broker-dealers and their associated persons,” Finra said. Even less frequently, Finra said, do they represent “associated persons in expungement claims brought against broker-dealers.”
Still, Finra’s review found “several recent allegations of improper conduct” by them—including an instance when California regulators found one had engaged in unauthorized practice of law, falsely promised to help customers recover past failed investments and violated state rules by charging advance fees.
Another compensated non-lawyer representing an investor in Finra’s dispute forum was criminally sentenced in New York for felony grand larceny after scheming to defraud and falsify business records about a matter before an arbitration panel, Finra said. Another one “misrepresented his identity in order to represent parties,” Finra said.
Finra also heard from forum users that the compensated non-attorneys “cold call investors with aggressive sales tactics; pursue frivolous claims; misrepresent or willfully fail to disclose important facts relating to their background,” the regulator said. The compensated non-lawyers also “achieve worse outcomes or awards for their clients or settle cases for lower amounts than attorneys,” Finra said. Often, they “work in coordination with persons who are suspended or barred from the securities industry,” Finra said.
Barring them will ensure “no party faces the risk of harm,” may benefit investors who would otherwise fall into their traps and lead to “a reduction in frivolous claims or arguments, thereby reducing the costs…to resolve disputes,” Finra said.