Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of 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, 71051-71063 [2023-22612]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 88, Number 197 (Friday, October 13, 2023)]
[Notices]
[Pages 71051-71063]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-22612]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98703; File No. SR-FINRA-2023-013]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of 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

October 6, 2023.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 5, 2023, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rule 12208(b) through (d) of the 
Code of Arbitration Procedure for Customer Disputes (``Customer 
Code''), FINRA Rule 13208(b) through (d) of the Code of Arbitration 
Procedure for Industry Disputes (``Industry Code'') and FINRA Rule 
14106(b) through (d) of the Code of Mediation Procedure (``Mediation 
Code'' and collectively, ``Codes''), to revise and restate the 
qualifications for representatives in arbitrations and mediations in 
the forum administered by FINRA Dispute Resolution Services (``DRS''); 
to disallow compensated representatives who are not attorneys from 
representing parties in the DRS forum; to codify that 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 
may represent investors in the DRS forum; and to clarify the 
circumstances in which any person, including attorneys, would be 
prohibited from representing parties in the DRS forum.
    The text of the proposed rule change is available on FINRA's 
website at https://www.finra.org, at the principal office of FINRA and 
at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
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'').\3\ Some NARs receive compensation in 
connection with their representation of parties (``compensated NARs''). 
Compensated NARs receive monetary or non-monetary compensation in 
connection with the representation of parties--including, for example, 
advance fees, consulting fees, payments in kind, referral fees or fees 
pursuant to a contingent fee arrangement. Other NARs, often friends or 
relatives of a party, may assist parties with their cases without 
compensation (``uncompensated NARs''). In addition, although not 
specifically provided for in

[[Page 71052]]

the Codes, law students typically represent parties pro bono while 
practicing under the supervision of an attorney through securities 
arbitration clinics (``SACs'').\4\
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    \3\ See FINRA Rules 12208, 13208 and 14106.
    \4\ SACs are affiliated with law schools and are typically 
staffed by second- or third-year law students. SACs provide pro bono 
legal representation to individual customers who seek to arbitrate 
or mediate claims under $100,000 and who cannot find or afford an 
attorney to represent them. Generally, SACs require that potential 
clients not exceed specified household income and asset 
requirements. Currently, 10 SACs operate in the District of 
Columbia, Florida, Illinois, New Jersey, New York and Pennsylvania. 
For more information on SACs, see https://www.finra.org/arbitration-mediation/how-find-attorney.
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    In response to forum users' concerns regarding the conduct of 
compensated NARs,\5\ FINRA has reviewed their representation of parties 
in arbitration and mediation in the DRS forum.\6\ FINRA observes that 
compensated NARs represent customers in a small percentage of the 
customer cases in the DRS forum--one percent--and that only a few 
compensated NARs regularly operate in the DRS forum today.\7\ 
Compensated NARs often possess a background in the securities industry 
and primarily represent individuals in arbitration or mediation claims 
against broker-dealers and their associated persons.\8\ Less commonly, 
they may represent associated persons in expungement claims brought 
against broker-dealers. Compensated NARs often associate with companies 
(``NAR firms'') that are in the business of bringing these claims and 
providing related services, such as evaluations of customer account 
activity.
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    \5\ The suggestion to study the role of compensated NARs in 
arbitration and mediation originated from the FINRA Dispute 
Resolution Task Force (``Task Force''). The Task Force was formed to 
suggest strategies to enhance the transparency, impartiality and 
efficiency of the DRS forum and included representatives from the 
industry and the public with a broad range of interests in 
securities dispute resolution. See Final Report and Recommendations 
of the FINRA Dispute Resolution Task Force, https://www.finra.org/sites/default/files/Final-DR-task-force-report.pdf.
    \6\ In Regulatory Notice 17-34 (October 2017) (``Notice''), 
FINRA sought responses to questions related to forum users' 
experiences with compensated NARs and whether it would be prudent to 
further restrict their representation of parties. See infra Item 
II.C. (discussing the Notice and summarizing comments).
    \7\ See infra Item II.B. (discussing Economic Impact 
Assessment).
    \8\ See infra note 87 and accompanying text.
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    Despite the low number of compensated NARs, FINRA's review 
identified several recent allegations of improper conduct by 
compensated NARs in connection with their representation of parties in 
the DRS forum. In contrast, FINRA has not identified any allegations of 
improper conduct by uncompensated NARs or law students. Unlike 
compensated NARs, uncompensated NARs (often friends or relatives of a 
party) lack a direct pecuniary incentive to engage in misconduct when 
seeking new client relationships or bringing claims in the DRS forum. 
In addition, unlike uncompensated NARs, law students seeking 
educational opportunities to gain legal experience participate in SACs 
under the supervision of attorneys and typically represent parties pro 
bono. Thus, FINRA's focus at this time is on the representation of 
parties in the DRS forum by compensated NARs. For example, the State of 
California recently brought a civil enforcement action against several 
compensated NARs for engaging in the unauthorized practice of law, in 
part in the DRS forum; falsely promising to help customers recover 
their past failed investments through, in part, arbitration in the DRS 
forum; and charging advance fees in violation of California law.\9\ 
Another compensated NAR was criminally sentenced in New York for felony 
grand larceny, engaging in a scheme to defraud, and falsification of 
business records in connection with proceedings that the compensated 
NAR initiated in the DRS forum. A different compensated NAR 
misrepresented his identity in order to represent parties in DRS 
proceedings even though he was not qualified to do so. In addition, 
forum users have asserted that compensated NARs cold call investors 
with aggressive sales tactics; \10\ pursue frivolous claims; \11\ 
misrepresent or willfully fail to disclose important facts relating to 
their background; \12\ achieve worse outcomes or awards for their 
clients or settle cases for lower amounts than attorneys; \13\ and work 
in coordination with persons who are suspended or barred from the 
securities industry.\14\
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    \9\ See Complaint for Injunctive Relief, Civil Penalties and 
Other Ancillary Relief, People v. Chambliss Corp., No. 18STCV05586 
(Cal. Super. Ct. filed Nov. 19, 2018); see also People v. Chambliss 
Corp., No. 18STCV05586, 2020 Cal. Super. LEXIS 72668 (Cal. Super. 
Ct. Nov. 12, 2020) (order granting stipulated judgment against 
Defendant Casey C. Mielnik, a compensated NAR, for violations of 
false advertising, unfair competition law, and telephonic sellers 
law); Chambliss Corp., No. 18STCV05586 (Cal. Super. Ct. Nov. 24, 
2020) (order regarding Defendant National Advisory Network, Inc. and 
granting default judgment against 11 defendants, nine compensated 
NARs and two nonlegal corporations, for false advertising, unfair 
competition law, telephonic sellers law, and unauthorized practice 
of law); Chambliss Corp., No. 18STCV05586 (Cal. Super. Ct. Nov. 24, 
2020) (order regarding Defendants Jay R. Jeskie, Eric D. Harris, 
Elijah Schnell, Matthew J. Cano, John W. Martynec, Gordon A. Herman 
and granting default judgment against 11 defendants, nine 
compensated NARs and two nonlegal corporations, for false 
advertising, unfair competition law, and telephonic sellers law); 
Chambliss Corp., No. 18STCV05586 (Cal. Super. Ct. Jan. 13, 2021) 
(order granting motion for summary adjudication against Defendant 
Amanda L. Langer, a compensated NAR, for violating unfair 
competition law, unauthorized practice of law, and telephonic 
sellers law); People v. Chambliss Corp., No. 18STCV05586, 2022 Cal. 
Super. LEXIS 86977 (Cal. Super. Ct. Sept. 29, 2022) (judgment 
against attorney Peter A. Bumerts for the unauthorized practice of 
law, false advertising, unfair competition law, and aiding and 
abetting the unauthorized practice of law).
    \10\ See infra note 88 and accompanying text.
    \11\ See infra note 89 and accompanying text.
    \12\ See, e.g., PIABA, infra note 115.
    \13\ See David E. Robbins, 1 Sec. Arb. Proc. Manual Sec.  6-2, 
Release No. 26 (5th ed. 2022); infra note 90 and accompanying text.
    \14\ See infra note 87 and accompanying text.
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    FINRA is concerned about these serious allegations and the 
potential harm to parties represented by compensated NARs, particularly 
to customers. This concern is heightened because parties are 
compensating these NARs to represent them in the DRS forum, yet there 
is no direct regulation of compensated NAR conduct. Although 
compensated NARs may be subject to state laws governing general 
business practices,\15\ 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.\16\ FINRA is concerned that compensated NARs' interactions with 
customers are not subject to regulation like the state disciplinary 
rules on lawyer advertising and solicitation,\17\ and that this also is

[[Page 71053]]

not an area that FINRA regulates. Although they are engaged in the 
business of representing parties in the DRS forum, compensated NARs 
also are not required to purchase malpractice insurance and their 
clients are not protected by statewide client protection funds.\18\ In 
contrast, all U.S. jurisdictions require attorneys to finance client 
protection funds through association dues, lawyer registration fees or 
annual assessments. Because customers of compensated NARs do not 
benefit from the client protections and disciplinary processes that 
apply to attorneys, they may have limited recourse if they are harmed 
by the misconduct of compensated NARs.\19\
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    \15\ See, e.g., Cal. Bus. & Prof. Code Sec.  17200 (amended 
1992) (prohibiting any unlawful, unfair or fraudulent business act 
or practice and unfair, deceptive, untrue or misleading 
advertising).
    \16\ Generally, 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 legal 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. For 
more information on state-by-state requirements to become a lawyer, 
see generally https://www.lawyeredu.org.
    In addition, all jurisdictions require lawyers to abide by rules 
of professional conduct, which are enforced through state 
disciplinary processes. See Peter A. Joy, Making Ethics Opinions 
Meaningful: Toward More Effective Regulation of Lawyers' Conduct, 15 
Geo. J. Legal Ethics 313, 317 (2002).
    \17\ See, e.g., Cal. Rules of Prof'l Conduct R. 7 (2018) 
(ensuring that attorney advertisements or solicitations are not 
misleading, clearly identifiable as advertisements; ensuring the 
advertiser's accountability; and mitigating the use of any undue 
duress or pressure by prohibiting, for example, solicitation of a 
potential client through in-person, telephone or real-time 
electronic communication); N.Y. Rules of Prof'l Conduct R. 7.3 
(amended 2017) (prohibiting attorneys from engaging in solicitation 
or advertisement by in-person or telephone contact or by real-time 
or interactive computer-accessed communication unless the recipient 
is a close friend, relative, former client or existing client; 
providing examples of prohibited forms of solicitations and 
advertisements); Restatement (Third) of The Law Governing Lawyers 
Sec.  1 cmt. b (2000) (providing that federal courts often apply the 
ethical rules and standards adopted by the state in which the court 
sits). NARs may be subject to more general state marketing 
regulations. See, e.g., Cal. Bus. & Prof. Code Sec.  17511 (amended 
2023) (requiring telephone solicitors to register prior to doing 
business in California).
    \18\ A ``client protection fund'' is a pool of money funded and 
maintained by a bar association or regulatory agency, the purpose of 
which is to reimburse clients who have suffered financial loss due 
to the dishonest acts of lawyers. See American Bar Association 
(``ABA''), A History of Client Protection Rules, https://www.americanbar.org/groups/professional_responsibility/resources/client_protection/history; see also ABA Center on Professional 
Responsibility, Survey of Lawyers' Funds for Client Protection 2017-
2019, at 8 (2020), https://qa.americanbar.org/content/dam/aba/administrative/professional_responsibility/2017-2019-cp-survey.pdf.
    \19\ FINRA notes that it does not have direct authority to 
investigate or discipline representative misconduct in the DRS 
forum. Cf. FINRA Rule 8310 (allowing FINRA to impose sanctions on 
member firms and persons associated with member firms). Currently, 
if an attorney is allegedly engaging in misconduct in the DRS forum, 
FINRA may make a referral to the attorney's disciplinary agency, 
which has processes to respond to misconduct of attorneys subject to 
its jurisdiction. If a compensated NAR is allegedly engaging in 
misconduct in the DRS forum, FINRA may make a referral to law 
enforcement or an appropriate state agency.
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    FINRA also is concerned that parties may be harmed due to the lack 
of recourse when compensated NARs are found to be engaged in the 
unauthorized practice of law pursuant to the law of the relevant U.S. 
jurisdiction. 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.\20\ DRS arbitrators have also issued 
awards dismissing claims, or finding against investors, after 
determining that a compensated NAR's representation of the investor 
constituted the unauthorized practice of law in the jurisdiction.\21\ 
The compensated NAR's unauthorized practice of law may also be part of 
a broader pattern of misconduct that harms customers.\22\
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    \20\ See, e.g., Empire Asset Mgmt. Co. v. Sherer, 19-555-CB 
(Mich. 5th Cir. Ct. Feb. 7, 2020); see also Disciplinary Counsel v. 
Alexicole, Inc., 822 NE2d 348, 350 (Ohio 2004) (finding that the 
representation of parties in securities arbitration by non-attorneys 
constituted the unauthorized practice of law).
    \21\ See, e.g., Simon v. Aegis Cap. Corp., FINRA Disp. Resol. 
Case No. 15-02865 (2016) (Parker, Arb.) (finding that customer 
claimant was not entitled to an award and was responsible for the 
DRS forum fees, either because the claimant's submissions were 
invalidated by the compensated NAR's unauthorized practice of law, 
or because the claimant had not sustained his burden of proof); 
Halling v. Cape Sec. Inc., FINRA Disp. Resol. Case No. 16-00519 
(2017) (Brahin, Arb.) (finding that representation by compensated 
NARs in the DRS forum was not legally permissible in Kansas, and 
striking customer claimant's pleadings); see also Wells v. Worden 
Cap. Mgmt., LLC, FINRA Disp. Resol. Case No. 19-02241 (2020) 
(Carvell, Arb.) (ordering claimant to proceed pro se or retain an 
attorney following compensated NAR's withdrawal in response to 
respondents' motion to strike the statement of claim on the basis 
that claimant's compensated NAR engaged in the unauthorized practice 
of law by filing the claim); Neuss v. Wells Fargo Inv., LLC, FINRA 
Disp. Resol. Case No. 10-01320 (2011) (Albini, Arb.) (partially 
granting respondents' motion in limine to disqualify claimants' 
compensated NAR, and denying claimants' motion to suspend the 
hearing and dismiss claims without prejudice); Best v. Columbus 
Advisory Group, Ltd., FINRA Disp. Resol. Case No. 18-03337 (2020) 
(Putnam, Arb.) (dismissing claimant's case with prejudice as a 
sanction for material and intentional failure to comply with the 
arbitrator's order issued during the compensated NAR's 
representation of the claimant).
    \22\ See Chambliss, supra note 9 and accompanying text. A number 
of commenters raised other concerns about compensated NARs' 
unauthorized practice of law. See infra notes 96-99 and accompanying 
text.
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    The current rule's prohibition on representing a party if state law 
prohibits the representation does not fully address the concern 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.\23\ FINRA is not 
aware of any U.S. jurisdiction that explicitly allows parties to be 
represented by compensated NARs in the DRS forum by statute or rule. 
Only a few U.S. jurisdictions' unauthorized practice of law or 
professional conduct committees have specifically addressed compensated 
NAR representation of parties in arbitration or mediation in the DRS 
forum, and those that have done so concluded that their representation 
in the DRS forum constitutes the unauthorized practice of law.\24\ Many 
other U.S. jurisdictions' standards may be less clear, but could 
potentially be interpreted as prohibiting compensated NARs from 
representing parties in the DRS forum.\25\ In New York, compensated 
NARs rely on trial-level court opinions to represent parties in the DRS 
forum.\26\
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    \23\ See FINRA Rules 12208(c), 13208(c) and 14106(c).
    \24\ Unauthorized practice of law or professional conduct 
committees in Florida, Illinois and Ohio have concluded that 
compensated NAR representation of parties in securities arbitration 
constitutes the unauthorized practice of law. See Fla. Bar Re 
Advisory Op. on Nonlawyer Representation in Sec. Arbitration, 696 
So. 2d 1178, 1180 (Fla. 1997) (concluding that compensated non-
attorney representation of customers in securities arbitration 
constitutes the unauthorized practice of law and enjoining non-
attorneys from representing customers for compensation in securities 
arbitration proceedings); Ill. State Bar Ass'n Standing Comm'n on 
Prof'l Conduct, Advisory Op. 13-03, at 7 (2013), https://www.isba.org/sites/default/files/ethicsopinions/13-03.pdf (stating 
that non-attorney representation in a FINRA arbitration generally 
constitutes the unauthorized practice of law and suggesting that 
FINRA arbitrators notify FINRA and the Illinois Attorney 
Registration and Disciplinary Committee if a non-attorney represents 
a party in FINRA arbitration); Disciplinary Counsel v. Alexicole, 
Inc., 822 NE2d 348, 350 (Ohio 2004) (finding that the representation 
of parties in securities arbitration and mediation by non-attorneys 
constitutes the unauthorized practice of law); see also Sara Rudolph 
Cole, Blurred Lines: Are Non-Attorneys Who Represent Parties in 
Arbitrations Involving Statutory Claims Practicing Law? 48 U.C. 
Davis L. Rev. 921, 948-958 (2015) (noting that unauthorized practice 
of law or professional conduct committees in Florida, Illinois and 
Ohio have concluded that compensated NAR representation of parties 
in securities arbitration constitutes the unauthorized practice of 
law). In addition, two committees of the Illinois State Bar 
Association sent three comment letters to the Notice in support of 
prohibiting compensated NARs and argued that their representation of 
parties in the DRS forum constituted the unauthorized practice of 
law. See infra note 83 and accompanying text.
    \25\ See, e.g., Tex. Gov't Code Sec.  81.101 (amended 1999) 
(stating that practice of law includes ``a service rendered out of 
court, including the giving of advice or the rendering of any 
service requiring the use of legal skill or knowledge,'' and that 
this definition was ``not exclusive and does not deprive the 
judicial branch of the power and authority under both this chapter 
and the adjudicated cases to determine whether other services and 
acts not enumerated may constitute the practice of law''); Ky. SCR 
Rule 3.020 (amended 1978) (defining the practice of law as ``any 
service rendered involving legal knowledge or legal advice, whether 
of representation, counsel or advocacy in or out of court, rendered 
in respect to the rights, duties, obligations, liabilities, or 
business relations of one requiring the services.'').
    \26\ See DePalo v. Lapin, Index No. 114656/2008 (Sup. Ct. NY 
June 30, 2009); but cf. Aegis J. Frumento & Stephanie Korenman, 
Rethinking Non-Lawyer Advocacy in FINRA Customer Arbitrations, Sec. 
Arb. Commentator, March 17, 2017, at 1 (noting that the New York 
state court in Lapin only considered the status of a non-lawyer 
advocate in the context of deciding that his status as a non-lawyer 
did not render his statements any less privileged than those of any 
of the other participants in the arbitration).
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Proposed Rule Change
    FINRA Rules 12208(c), 13208(c) and 14106(c) currently prohibit

[[Page 71054]]

compensated and uncompensated NARs from representing parties in 
arbitration and mediation if: (1) state law prohibits such 
representation; (2) the person is currently suspended or barred from 
the securities industry in any capacity; or (3) the person is currently 
suspended from the practice of law or disbarred. 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.
    FINRA is proposing to amend the Codes to revise and restate the 
qualifications for representatives of parties using the DRS forum, and, 
for the reasons discussed above and below, to disallow compensated NARs 
from representing parties in the DRS forum.\27\ In addition, the 
proposed amendments would codify that 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 may represent 
investors in the DRS forum.\28\ The proposed amendments would also 
clarify the circumstances in which any person, including attorneys, 
would be prohibited from representing a party in the DRS forum,\29\ and 
that a challenge to the qualifications of a representative made outside 
of the proceeding would not stay or otherwise delay the proceeding 
without a court order.\30\
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    \27\ See proposed Rules 12208(b)(1), 13208(b)(1) and 
14106(b)(1). The proposed rule change would apply to all members, 
including members that are funding portals or have elected to be 
treated as capital acquisition brokers (``CABs''), given that the 
funding portal and CAB rule sets incorporate the impacted FINRA 
rules by reference.
    \28\ See proposed Rules 12208(b)(1)(B), 13208(b)(1)(B) and 
14106(b)(1)(B).
    \29\ See proposed Rules 12208(b)(2), 13208(b)(2) and 
14106(b)(2).
    \30\ See proposed Rules 12208(c), 13208(c) and 14106(c).
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A. Disallowing Compensated NARs in the DRS Forum
    The proposed rule change would disallow a person who is not an 
attorney and who may receive 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 held in a 
U.S. hearing location.\31\ This prohibition would apply if any form of 
monetary or non-monetary compensation would be received by the NAR in 
connection with the representation.
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    \31\ See proposed Rules 12208(b)(2)(D), 13208(b)(2)(D) and 
14106(b)(2)(D); see also proposed Rules 12208(b)(1)(C), 
13208(b)(1)(C) and 14106(b)(1)(C).
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    As noted above, compensated NARs represent customers in one percent 
of customer cases and only a few compensated NARs regularly practice in 
the DRS forum today.\32\ Despite the infrequency of compensated NAR 
representation, as discussed above, FINRA's review identified multiple 
allegations of improper conduct by compensated NARs, whose clients are 
not protected by the professional qualification requirements, ethical 
rules, disciplinary processes and client protections that apply when 
parties retain licensed attorneys.\33\ Moreover, parties may be harmed 
due to the lack of recourse when compensated NARs are found to be 
engaged in the unauthorized practice of law.\34\ These concerns are 
heightened due to the pecuniary incentives of compensated NARs when 
seeking new customer relationships or bringing claims in the DRS forum, 
such as engaging in aggressive sales techniques to obtain their 
business, pursuing frivolous claims, and charging clients non-
refundable processing or investigation fees.
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    \32\ See supra note 7 and accompanying text.
    \33\ See supra Item II.A.1. (discussing Background).
    \34\ See supra notes 20 and 21 and accompanying text.
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    Accordingly, FINRA believes that it is appropriate to disallow 
their representation of parties in proceedings in the DRS forum.
    FINRA understands that some parties with claims of $100,000 or less 
may have difficulty obtaining legal counsel. An attorney may, for 
example, believe that their share of a potential award might be too 
small to justify the effort. In addition, not all investors will 
qualify for assistance by, or are able to be serviced by, SACs.\35\ 
FINRA recognizes that some parties with smaller claims who might 
otherwise consider representation by a compensated NAR may not be able 
to obtain representation as a result of the proposed rule change.\36\
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    \35\ See supra note 4; see also infra Item II.C.(B) (summarizing 
comments, including from SACs, about the limitations on the 
availability of representation in the DRS forum).
    \36\ FINRA notes that it makes available efficient and cost-
effective alternative processes to a full arbitration proceeding for 
certain smaller claims. For example, claimants may proceed ``on the 
papers,'' where a chair-qualified arbitrator will make a decision 
based solely on the documents submitted. See FINRA Rules 12800 and 
13800; see also Simplified Arbitrations: Three Ways to Present Your 
Case to Arbitrators, https://www.finra.org/arbitration-and-mediation/simplified-arbitrations.
    FINRA has also introduced several incentives to encourage 
parties with smaller claims to resolve their disputes through FINRA 
mediation. For example, FINRA may offer mediation by telephone at no 
cost or at a significantly reduced hourly fee to parties arbitrating 
certain smaller claims. FINRA also encourages parties in arbitration 
to mediate by waiving the fee to postpone a hearing, except in cases 
of late postponement requests. See FINRA's Mediation Program for 
Small Arbitration Claims, https://www.finra.org/arbitration-mediation/finras-mediation-program-small-arbitration-claims.
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B. Required Statement of No Compensation for Uncompensated NAR 
Representation
    Proposed Rules 12208(b)(1)(C), 13208(b)(1)(C) and 14106(b)(1)(C) 
would provide 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 statement with the Director through the Party Portal.\37\ The 
written statement would have to be signed by the uncompensated NAR and 
the party and attest that the uncompensated NAR has not received, and 
will not receive, compensation in connection with the 
representation.\38\ The proposed amendment would help ensure that the 
NAR is truly uncompensated.
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    \37\ Under the Customer and Industry Codes, 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).
    \38\ See proposed Rules 12208(b)(1)(C), 13208(b)(1)(C) and 
14106(b)(1)(C).
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    FINRA believes that it would generally be appropriate to allow 
persons who wish to assist a party without receiving compensation, such 
as relatives or friends, to represent them in the proceeding. FINRA has 
not become aware of any concerns with uncompensated NARs' conduct. On 
the other hand, as discussed above and below, forum users have asserted 
that compensated NARs cold call investors with aggressive sales 
tactics; \39\ pursue frivolous claims; \40\ misrepresent or willfully 
fail to disclose important facts relating to their background; \41\ 
achieve worse outcomes or awards for their

[[Page 71055]]

clients or settle cases for lower amounts than attorneys; \42\ and work 
in coordination with persons who are suspended or barred from the 
securities industry.\43\ The proposed rule change would prohibit 
compensated NARs from representing parties in the DRS forum, decreasing 
the risk of potential harm to parties. Unlike compensated NARs, 
uncompensated NARs lack a direct pecuniary incentive to engage in 
misconduct when seeking new client relationships or participating in 
arbitrations or mediations in the DRS forum. However, uncompensated 
NARs would continue to be disallowed from representing a party if the 
laws of the relevant U.S. jurisdiction prohibits the 
representation.\44\
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    \39\ See infra note 88 and accompanying text.
    \40\ See infra note 89 and accompanying text.
    \41\ See, e.g., PIABA, infra note 115.
    \42\ See David E. Robbins, 1 Sec. Arb. Proc. Manual Sec.  6-2, 
Release No. 26 (5th ed. 2022); infra note 90 and accompanying text.
    \43\ See infra note 87 and accompanying text.
    \44\ See infra note 49 and accompanying text.
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C. Codifying the Role of Law Students and SACs
    FINRA also 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.\45\ 
Currently, the Codes do not specifically address the representation of 
parties in the DRS forum by law students. Currently, 10 SACs operate in 
five states and the District of Columbia.\46\ 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.\47\ Accordingly, FINRA believes that 
it would be appropriate to codify the role of law students--who would 
otherwise technically be considered NARs under the proposed rule 
change--in providing representation to investors through SACs.
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    \45\ See proposed Rules 12208(b)(1)(B), 13208(b)(1)(B) and 
14106(b)(1)(B).
    \46\ See supra note 4.
    \47\ See, e.g., N.Y. CLS Rules Sup. Ct. 805.5 (amended 2019); 
Cal. R. Ct. 9.42 (amended 2019); Fla. Bar Reg. R. 11 (amended 2023); 
Kan. Sup. Ct. R. 715 (adopted 2022); D.C. Ct. App. R. 48 (amended 
2014); O.C.G.A. Title 15, Ch. 20 (amended 1994); see also Peter A. 
Joy & Robert R. Kuehn, Conflict of Interest and Competency Issues in 
Law Clinic Practice, 9 Clinical L. Rev. 493 (2002) (describing the 
ethical obligations of law students and supervising attorneys).
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D. 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 any 
capacity or the person is currently suspended from the practice of law 
or disbarred.\48\ The proposed rule change would retain the substance 
of these provisions, while clarifying that the laws of U.S. 
jurisdictions that are not states may also disqualify the person from 
representing a party.\49\ In addition, because FINRA believes that all 
persons should be prohibited from practicing in the DRS forum for these 
reasons, the proposed amendments would also apply these prohibitions 
generally to all persons including attorneys.\50\
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    \48\ See FINRA Rules 12208(c), 13208(c) and 14106(c).
    \49\ See proposed Rules 12208(b)(2)(A), 13208(b)(2)(A) and 
14106(b)(2)(A).
    \50\ See proposed Rules 12208(b)(2)(C), 13208(b)(2)(C) and 
14106(b)(2)(C). If the SEC approves the proposed rule change, the 
prohibitions would not apply retroactively to attorneys who were 
suspended or barred from the securities industry prior to the 
effective date of the proposed rule change.
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    The proposed rule change would also specify that a person who is 
currently suspended from or denied the privilege of appearing or 
practicing before the Commission may not represent a party in the DRS 
forum.\51\ FINRA believes that incorporating these standards into the 
proposed rule change would help protect the integrity and quality of 
the DRS forum and protect investors.
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    \51\ See proposed Rules 12208(b)(2)(D), 13208(b)(2)(D) and 
14106(b)(2)(D). If the SEC approves the proposed rule change, 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. Pursuant to SEC Rule of Practice 102(e), the Commission may 
(1) deny the privilege of appearing or practicing before it to any 
person about whom the Commission has made certain findings after 
notice and opportunity for hearing in the matter; (2) suspend 
professionals from appearing or practicing before it upon their 
disbarment, license revocation or suspension, or conviction of a 
crime involving moral turpitude; or (3) temporarily suspend from 
appearing or practicing before it professionals who become subject 
to certain permanent injunctions or findings. See 17 CFR 201.102(e) 
(amended 2005). The rule was adopted ``to protect the integrity and 
quality of [the Commission's] system of securities regulation and, 
by extension, the interests of the investing public.'' See 
Securities Exchange Act Release No. 40567 (October 19, 1998), 63 FR 
57164, 57165 (October 26, 1998) (Order Approving File No. S7-16-98) 
(adopting amendments to Rule 102(e)(1)). In addition, pursuant to 
Section 205.6(b) of the Standards of Professional Conduct for 
Attorneys Appearing and Practicing Before the Commission in the 
Representation of an Issuer, the Commission may also deny attorneys 
the privilege of appearing or practicing before the Commission if 
they violate minimum standards of professional conduct in connection 
with the representation of an issuer. See 17 CFR 205.6(b) (2003).
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E. Determinations of Qualifications of Representatives
    The Codes currently 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, and that in the absence 
of a court order, the proceeding shall not be delayed, or an 
arbitration stayed, pending resolution of such issues.\52\ The proposed 
rule change would retain the substance of the current provision, which 
prevents delay while a challenge to the qualifications of a person to 
represent a party is resolved outside of the DRS forum. However, the 
proposed rule change would make some clarifying changes to the current 
provision. Specifically, the proposed rule change would 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.\53\ The proposal would remove the 
explicit reference to courts and regulatory agencies' separate 
authority to determine issues regarding the qualifications of a person 
to represent a party in arbitration (by, for example, determining that 
doing so would constitute the unauthorized practice of law) as 
unnecessary and to simplify the language.
---------------------------------------------------------------------------

    \52\ See FINRA Rules 12208(d), 13208(d) and 14106(d).
    \53\ See proposed Rules 12208(c), 13208(c) and 14106(c).
---------------------------------------------------------------------------

    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice. If approved, the amendments would be effective for arbitrations 
and mediations filed in the DRS forum on or after the effective date.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\54\ which requires, among 
other things, that FINRA rules must 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. 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

[[Page 71056]]

public interest generally from the potential harmful conduct and lack 
of recourse that may come from representation by compensated NARs.
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    FINRA believes that by disallowing compensated NARs from 
representing parties in the DRS forum, the proposed rule change will 
reduce the risk that parties, including investors, may be harmed by the 
activities of compensated NARs, only a few of which currently practice 
in the DRS forum. Although compensated NARs represent customers in one 
percent of the customer cases in the DRS forum, their actions may 
result in significant harm to those customers. This risk of harm is 
especially concerning because there is no direct regulation of 
compensated NAR conduct. As discussed above, FINRA's review identified 
multiple allegations of improper conduct by compensated NARs, who are 
not subject to the specific and extensive professional qualification 
requirements, ethical rules, disciplinary processes and client 
protections that apply to attorneys.\55\
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    \55\ See supra Item II.A.1. (discussing Background).
---------------------------------------------------------------------------

    These concerns are heightened due to the pecuniary incentives of 
compensated NARs when seeking new customer relationships or bringing 
claims in the DRS forum, such as engaging in aggressive sales 
techniques to obtain their business,\56\ pursuing frivolous claims,\57\ 
and charging clients non-refundable processing or investigation 
fees.\58\
---------------------------------------------------------------------------

    \56\ See infra note 88 and accompanying text.
    \57\ See infra note 89 and accompanying text.
    \58\ See infra note 91 and accompanying text.
---------------------------------------------------------------------------

    Unlike compensated NARs, uncompensated NARs (often friends or 
relatives of a party) lack this direct pecuniary incentive to engage in 
misconduct when seeking new client relationships or bringing claims in 
the DRS forum. In addition, unlike uncompensated NARs, law students 
seeking educational opportunities to gain legal experience participate 
in SACs under the supervision of attorneys and typically represent 
parties pro bono. Accordingly, FINRA believes that to protect investors 
and the public interest, it is appropriate to disallow compensated 
NARs' representation of parties in the DRS forum.
    The proposed amendments will also protect investors and the public 
interest by requiring uncompensated NARs, or the party they are 
representing, to submit a written statement that the NAR has not 
received, and will not receive, compensation in connection with the 
arbitration or mediation. This will help ensure that the NAR is truly 
uncompensated.
    The proposed rule change will also help protect investors and the 
public interest by codifying the ability of parties to be represented 
by law students through SACs.\59\ SACs provide an inexpensive option 
for customers who qualify and may not be able to find or afford an 
attorney. Codifying the ability of customers to be represented by law 
students through SACs may also make customers more aware of this 
alternative option for representation.
---------------------------------------------------------------------------

    \59\ See supra note 45 and accompanying text.
---------------------------------------------------------------------------

    The proposed rule change will also protect investors and the public 
interest by explicitly prohibiting any person, including attorneys, 
from representing a party if they are prohibited from doing so by the 
laws of the relevant U.S. jurisdiction; if they are currently suspended 
or barred from the securities industry; suspended or disbarred from the 
practice of law; or currently suspended or denied the privilege of 
appearing or practicing before the Commission.
    Finally, the proposed rule change will help ensure the fair, 
orderly and efficient administration of the DRS forum by providing that 
a challenge to the qualifications of a representative made outside of 
the arbitration or mediation proceeding shall not delay the proceeding 
in the absence of a court order.

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. A discussion of the economic 
impacts of the proposed rule change follows.
Economic Impact Assessment
1. Regulatory Need
    A large body of literature on the economics of expert services 
considers the necessity of professional standards and other 
restrictions on service providers when individuals have little ability 
to evaluate the quality of the service that they receive.\60\ This 
literature suggests that in the DRS forum, parties with little prior 
experience seeking representation would be vulnerable, absent 
sufficient restrictions, to retaining lower-quality services.
---------------------------------------------------------------------------

    \60\ A general survey is in Uwe Dulleck & Rudolf Kerschbamer, On 
Doctors, Mechanics, and Computer Specialists: The Economics of 
Credence Goods, 44(1) J. Econ. Literature, 5-42 (2006); see also 
Organization of Economic Cooperation and Development [OECD], 
Competitive Restrictions in Legal Professions, (April 27, 2009), 
https://www.oecd.org/regreform/sectors/40080343.pdf (discussing the 
regulation of legal services); Camille Chaserant & Sophie Harnay, 
The Regulation of Quality in the Market for Legal Services: Taking 
the Heterogeneity of Legal Services Seriously, 10(2) Eur. J. Compar. 
Econ. 267, 267-291 (2013) (reviewing the public and private interest 
approaches to the regulation in the market for legal services).
---------------------------------------------------------------------------

    Allegations relating to the conduct of compensated NARs in the DRS 
forum suggest that these concerns are not just hypothetical.\61\ 
Compensated NARs are not subject to the client protections and 
disciplinary processes that apply to attorneys. Parties in the DRS 
forum may have little prior experience bringing claims and seeking 
representation.\62\ The result may be that these parties are not 
sufficiently protected by competition, the reputation of providers, and 
the client protections and disciplinary procedures that apply to 
attorneys. In addition, harm may be incurred not only by the parties 
who retain compensated NARs but also by the other parties to the 
dispute.
---------------------------------------------------------------------------

    \61\ See infra note 71 (discussing the harm that may relate to 
the pecuniary incentives of compensated NARs); see also supra notes 
9-14 and accompanying text.
    \62\ FINRA has taken a number of steps to make arbitration and 
mediation accessible and affordable to parties. See supra note 36.
---------------------------------------------------------------------------

    To address this risk of harm, the proposed rule change would 
prohibit compensated NARs from representing parties in the DRS forum. 
The proposed rule change, however, would not prohibit representation by 
uncompensated NARs or law students, as discussed further below.
2. Economic Baseline
    The economic baseline for the proposed rule change is the current 
provisions of the Codes. The economic baseline also includes the laws 
of the relevant U.S. jurisdiction relating to the representation of 
parties. The proposed rule change is expected to affect compensated and 
uncompensated NARs, SACs and attorneys who may represent parties in the 
DRS forum. The proposed rule change also is expected to affect the 
parties to arbitrations and mediations including customers, member 
firms and associated persons.
    Customers in the DRS forum retain compensated NARs and SACs in a 
relatively small number of cases.\63\ From

[[Page 71057]]

January 2017 to December 2021 (the ``sample period''), 12,024 cases 
with a customer as a claimant were closed in the DRS forum.\64\ A 
customer was represented by a compensated NAR in 119 of the 12,024 
cases (one percent),\65\ and by a SAC in 67 of the 12,024 cases (less 
than one percent). Four different compensated NAR firms represented 
customers in the sample period, with two of the firms representing 
customers in 102 of the 119 cases (86 percent).\66\ Fifteen SACs also 
represented customers during the sample period.\67\ In the remaining 
cases, the customer was represented by an attorney in 10,620 cases (88 
percent), and appeared pro se in 1,218 cases (10 percent).\68\
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    \63\ FINRA can reasonably estimate, through a search and textual 
match of representative and organizational names, the number of 
compensated NARs and SACs that have represented parties in the DRS 
forum. This methodology, however, may not identify all such cases. 
The estimates herein describing the number of cases in which a party 
was represented by compensated NARs or SACs can, therefore, be 
considered a lower bound of the number of cases in which compensated 
NARs and SACs represented parties during the sample period (defined 
below). In general, information is not available for FINRA to 
reasonably estimate the number of uncompensated NARs who have 
represented parties in the DRS forum.
    \64\ FINRA did not identify any cases during the sample period 
where a customer who was a respondent was represented by a 
compensated NAR or SAC. Cases in the DRS forum are typically filed 
in arbitration rather than mediation. Of the 12,024 cases that were 
closed in the DRS forum, 9,824 cases were filed and closed in 
arbitration (82 percent), 2,069 cases were filed in arbitration but 
resulted in a mediation (17 percent), and 131 cases were both filed 
and closed in mediation (one percent). FINRA also identified 373 
instances where customers initiated a pre-arbitration mediation but 
no mediation took place, often because the opposing party did not 
agree to mediate the dispute or the matter was not eligible for 
mediation. In most of these instances, customers initiated the 
mediation without representation.
    \65\ FINRA identified 52 cases filed during the sample period 
where a compensated NAR represented a customer as claimant at the 
time of the filing, but was then not retained for the duration of 
the arbitration.
    \66\ FINRA identified one case among the 12,024 sample customer 
cases in which a compensated NAR represented an associated person. 
To simplify the analysis, the Economic Impact Assessment focuses on 
compensated NAR representation of customers only. FINRA also 
identified one compensated NAR who represented associated persons in 
multiple expungement claims brought against broker-dealers in 2020 
and 2021.
    \67\ Currently, 10 SACs provide representation to parties in the 
DRS forum. See supra note 4.
    \68\ The 10,620 cases may include some instances in which 
customers were represented by uncompensated NARs rather than an 
attorney. However, in the experience of FINRA staff, few customers 
are represented by uncompensated NARs.
---------------------------------------------------------------------------

    The customers who were represented by compensated NARs or SACs had 
a higher percentage of smaller claims than customers who were 
represented by attorneys. The following table describes the size of 
claims by representation type.
[GRAPHIC] [TIFF OMITTED] TN13OC23.077

    The subsequent table describes case outcomes by representation 
type. In the table below, FINRA identified case outcomes as resulting 
in settlement (Settlements), closed by hearing or ``on the papers'' 
(Awards), withdrawn (Withdrawn), or closed by other means (All 
Others).\69\ For the cases closed by hearing or ``on the papers,'' 
FINRA also identified the number of cases where customers were awarded 
damages (Award >$0). The relative outcomes for compensated NARs (e.g., 
that they settle a smaller proportion of cases) may neither support nor 
contradict the anecdotal evidence that compensated NARs achieve worse 
outcomes or awards for their clients than attorneys, but may instead 
reflect the characteristics of the claims.
---------------------------------------------------------------------------

    \69\ The cases that closed by other means include claims that 
were deficient and therefore not served on respondents, claims where 
the use of the DRS forum was not permitted, and claims that were 
combined with separate but related claims.
[GRAPHIC] [TIFF OMITTED] TN13OC23.078


[[Page 71058]]


3. Economic Impact
A. Overview
    In general, the proposed rule change would address the 
representation of parties by NARs and law students through SACs. The 
economic effects relating to these proposed amendments are discussed 
below.\70\
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    \70\ FINRA anticipates the other proposed amendments would not 
result in material economic impacts. For example, the proposed rule 
change would clarify that the laws of U.S. jurisdictions that are 
not states may also disqualify attorneys or non-attorneys from 
representing parties, and prohibit attorneys from representing a 
party if they are currently suspended or barred from the securities 
industry. FINRA is not aware of previous instances where these 
amendments would impact the representation of parties in the DRS 
forum or result in its associated benefits or costs. These other 
proposed amendments are not discussed below.
---------------------------------------------------------------------------

B. Anticipated Benefits
    Prohibiting compensated NARs from representing parties in the DRS 
forum ensures that no party faces the risk of harm that has been 
associated with compensated NARs.\71\ The parties who may benefit 
include those who would have retained a compensated NAR (with the 
associated risks) and that achieve the same or superior arbitration 
outcome with different representation net of any additional financial 
cost. The other parties to the arbitration or mediation may benefit if 
there is a reduction in frivolous claims or arguments, thereby reducing 
the costs (e.g., the legal expense and time that would otherwise be 
used for other business) to resolve disputes. Parties with fewer 
resources to resolve disputes (e.g., small firms) may benefit more from 
the reduction in frivolous claims or arguments than parties with 
greater resources.\72\
---------------------------------------------------------------------------

    \71\ The risk of harm would relate to the pecuniary incentives 
of compensated NARs when seeking new client relationships (e.g., 
aggressive sales techniques such as cold calling) or bringing claims 
in the DRS forum. See infra notes 88, 89 and 91 and accompanying 
text. FINRA cannot quantify the extent to which the absence of 
client protections and disciplinary processes that apply to 
attorneys may influence the conduct of compensated NARs or the 
effectiveness of those disciplinary processes on the conduct of 
attorneys. Survey evidence from 43 states and the District of 
Columbia reported by the ABA suggests that in 2019 approximately 0.2 
percent of all practicing attorneys were publicly disciplined for 
misconduct. See ABA Profile of the Legal Profession 2022, https://www.americanbar.org/content/dam/aba/administrative/news/2022/07/profile-report-2022.pdf.
    \72\ See M. Kaplan, infra note 89.
---------------------------------------------------------------------------

    Parties may also benefit from increased certainty, at the outset of 
the proceeding, as to whether a party's representative is permitted to 
represent a party in the DRS forum. For example, the laws that govern 
the representation of parties differ from state to state, and it may be 
unclear whether compensated NARs can represent parties in the DRS forum 
or are engaged in the unauthorized practice of law.\73\ Parties would 
not incur the costs associated with retaining a compensated NAR who is 
later determined to be engaging in the unauthorized practice of law. In 
these instances, compensated NARs may be enjoined from continuing their 
representation of parties during pending arbitrations, and parties may 
incur the costs to seek and retain new representation.\74\ Arbitrators 
may also issue awards dismissing claims, or finding against parties, if 
they determine that a compensated NAR's representation of the party 
constitutes the unauthorized practice of law in the jurisdiction.\75\ 
Parties would also have reasonable certainty that NAR representation is 
uncompensated and permitted under the Codes, subject to specified 
conditions.
---------------------------------------------------------------------------

    \73\ See supra notes 24-26 and accompanying text.
    \74\ See supra note 20.
    \75\ See supra note 21. As discussed below in Item II.B.3.D., 
``Anticipated Competitive Effects,'' parties may benefit from an 
increase in DRS forum efficiency (relating to the operation of forum 
proceedings) resulting from a decrease in the number of challenges 
to compensated NAR representation.
---------------------------------------------------------------------------

    Lastly, customers to an arbitration or mediation may benefit from 
the codification of the role of law students and SACs in the DRS forum. 
Parties would have reasonable certainty that the law students enrolled 
in law school are under the supervision of an attorney and permitted to 
represent parties in the DRS forum. To the extent that customers may 
become more aware of the availability of SACs as a result of the 
proposed rule change, and SACs have the capacity to represent them, 
customers who have determined the need for representation may incur 
fewer costs.
C. Anticipated Costs
    The proposed rule change also could impose costs on some parties 
who may be more likely to consider compensated NARs for representation 
under the baseline (e.g., parties with smaller claims). Some of these 
parties may choose compensated NARs who do not engage in misconduct. 
Under the proposed rule change, parties who have determined to seek 
representation, and would otherwise retain compensated NARs who do not 
engage in misconduct, may incur additional costs (e.g., higher fees) to 
retain alternative representation (e.g., attorneys) or may forgo 
representation and appear pro se. Given the limited data, however, it 
is not clear whether the cost of attorney services may increase as a 
result of the proposal in states where compensated NARs currently 
provide services, but any effect would likely be small given the small 
number of matters handled by compensated NARs in any year. Parties 
alternatively may forgo representation and appear pro se. These parties 
may be less experienced in the DRS forum and as a result may be 
inconvenienced or possibly obtain worse outcomes or awards.\76\ We 
cannot, however, estimate the extent of this effect.
---------------------------------------------------------------------------

    \76\ FINRA notes that it advises arbitrators on the treatment of 
pro se parties, including advising arbitrators to be sensitive to 
the fact that the pro se party is most likely inexperienced in 
either litigation or the arbitration process, and that pro se 
parties may need some guidance from the panel. See FINRA Dispute 
Resolution Services Arbitrator's Guide, https://www.finra.org/sites/default/files/arbitrators-ref-guide.pdf.
---------------------------------------------------------------------------

    Compensated NARs would lose the business of representing parties in 
the DRS forum which may be their sole business. Although compensated 
NARs may replace the lost business with other opportunities or 
employment, they would incur search costs in the form of time, effort 
and expense. These other opportunities or employment may also not be as 
profitable as representing parties in the DRS forum. The costs to 
compensated NARs from the loss of business would depend on their 
earnings from representing parties in the DRS forum, the costs of 
searching for other business opportunities or employment, and the 
profitability of these other ventures.\77\
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    \77\ The loss of business by compensated NARs attributable to 
the proposed rule change includes only that which does not 
constitute the unauthorized practice of law. The extent to which the 
representation of parties by compensated NARs in arbitration or 
mediation in a particular jurisdiction is legally permissible is 
often not known. See supra note 24 and accompanying text.
---------------------------------------------------------------------------

    Uncompensated NARs, or the party they are representing, would incur 
the cost to prepare and submit a written statement to the Director 
attesting that the NAR has not received, and will not receive, 
compensation in connection with the representation. FINRA anticipates, 
however, that these costs should not be material and would not restrict 
uncompensated NARs from representing parties in the DRS forum.\78\
---------------------------------------------------------------------------

    \78\ See supra Item II.A.1.B. and accompanying text. The 
proposed rule change would not permit uncompensated NARs, or the 
party they are representing, to refile a previously obtained 
statement of no compensation from another case, as these statements 
will necessarily be specific to the individual representation.
---------------------------------------------------------------------------

D. Anticipated Competitive Effects
    The proposed rule change may result in other economic effects. 
These other economic effects relate to the choice of representation in 
the DRS forum and the efficiency of the DRS forum.

[[Page 71059]]

    Attorneys would have less competition to provide legal services to 
parties who may have otherwise considered compensated NARs for 
representation, and some attorneys may experience an increase in 
business from representing these parties. The shift of business from 
the compensated NARs, who would have otherwise been retained by parties 
in the DRS forum, is likely not a new economic cost or benefit of the 
proposed rule change but is instead an economic transfer from 
compensated NARs to attorneys.
    The proposed rule change may also impact the efficiency of the DRS 
forum to process and resolve disputes in a timely manner. The 
efficiency of the DRS forum may increase if the conduct of compensated 
NARs would have hindered or delayed the proceedings.\79\ The efficiency 
of the DRS forum may also increase as a result of arbitrators no longer 
being required to resolve issues regarding the ability of NARs to 
represent parties in arbitration.\80\ The efficiency of the DRS forum 
to process and resolve disputes may decrease, however, if parties who 
have determined the need for representation, and would otherwise retain 
compensated NARs if not for the proposed rule change, forgo 
representation. These parties may be less familiar with DRS forum 
procedures, and this unfamiliarity may result in delays.
---------------------------------------------------------------------------

    \79\ Commenters stated that participation by compensated NARs 
resulted in longer or additional hearings. See Commonwealth and 
Harris, infra note 90.
    \80\ See supra note 21.
---------------------------------------------------------------------------

4. Alternatives Considered
    FINRA considered establishing additional requirements on 
compensated NARs before they could represent a party in an arbitration 
or mediation in the DRS forum, such as requiring compensated NARs to 
demonstrate that the applicable state or other U.S. jurisdiction 
considers the representation by the compensated NAR in the DRS forum to 
be appropriate and legally permissible. FINRA rejected this alternative 
as unworkable due to the uncertainty as to whether NARs could legally 
represent parties in the DRS forum in different U.S. jurisdictions and 
feedback from state institutions indicating that they would not opine 
on the ability of a NAR to represent parties in securities arbitration 
in the DRS forum.
    The proposed rule change would not prohibit uncompensated NARs from 
representing parties in the DRS forum. Like compensated NARs, 
uncompensated NARs are not subject to the client protections and 
disciplinary processes the states and jurisdictions have determined 
should apply to attorneys. Unlike compensated NARs, however, 
uncompensated NARs do not have the direct pecuniary incentive to engage 
in misconduct when seeking new client relationships or bringing claims 
in the DRS forum, and FINRA is not aware of any assertions of 
misconduct by uncompensated NARs. Further, prohibiting uncompensated 
NARs in addition to prohibiting compensated NARs would remove the 
possibility of substituting compensated with uncompensated NARs, 
although the extent to which individuals would do so is not known. 
These parties, and parties who would have otherwise retained 
uncompensated NARs, would instead have been required to retain an 
attorney or appear pro se.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    In October 2017, FINRA published the Notice requesting comment on 
forum users' experiences with compensated NARs and whether FINRA should 
further restrict their representation of parties.\81\ FINRA received 59 
comment letters in response to the Notice. A copy of the Notice is 
available on FINRA's website at https://www.finra.org. A list of the 
comment letters received in response to the Notice is available on 
FINRA's website.\82\ Copies of the comment letters received in response 
to the Notice are available on FINRA's website.
---------------------------------------------------------------------------

    \81\ Although the Notice was focused on compensated NAR firms, 
the commenters who addressed uncompensated NARs and SACs generally 
supported continuing to allow them to represent parties in the DRS 
forum. See Aidikoff, Bakhtiari, Cornell, Cottone, FSI, Georgia, 
Harris, J. Kaplan, M. Kaplan, Pace, PIABA, Port, SIFMA, St. John's 
and Wexler. But see CSAG and Sacks (questioning the efficacy of 
SACs).
    \82\ See SR-FINRA-2023-013 (Form 19b-4, Exhibit 2b) for a list 
of abbreviations assigned to commenters (available on FINRA's 
website at https://www.finra.org).
---------------------------------------------------------------------------

    Most of the commenters supported restricting compensated NARs' 
ability to represent parties in the DRS forum. Twenty-eight commenters 
supported prohibiting the representation of parties by compensated NARs 
entirely.\83\ Four commenters supported limiting the dollar value or 
complexity of the cases that compensated NARs could handle,\84\ and six 
other commenters supported imposing other restrictions on 
representation by compensated NARs.\85\ Twenty-one commenters, 15 of 
whom were clients of a single NAR firm, supported continuing to allow 
compensated NARs to represent parties in the DRS forum.\86\ A summary 
of the comments and FINRA's responses are discussed below.
---------------------------------------------------------------------------

    \83\ See Aidikoff, Bakhtiari, Bandes, Caruso, Commonwealth, 
Cottone, Dobin, Edwards, Feldman, Glick, Harris, Ilgenfritz, ISBA 
Business, ISBA Unauthorized, ISBA Task, J. Kaplan, Kohler, M. 
Kaplan, Lincoln Financial, Meyer, Nelson, PIABA, Port, Sabino, 
SIFMA, St. John's, Sutherland and Wexler.
    \84\ See BFS, Cornell, Sec. Arb. Commentator and Wall.
    \85\ See Benade, FSI, Georgia, Pace, Starr and Wood.
    \86\ See Abrahamsen, A. Lincoln, Bartness, Byrd, CSAG, Flack, 
Hambright, Inglis, Kabat, Kashouty, Kuefler, Mitchell, Mulligan, 
Neuman, Pate, Sacks, Scronce, Stein, Steinmetz, Stott and Wilson.
---------------------------------------------------------------------------

(A) Comments That Supported Prohibiting Compensated NARs From 
Representing Parties in the DRS Forum
Criticisms of Compensated NARs
    In the Notice, FINRA requested comment on experiences with NAR 
firms in the DRS forum and whether FINRA should amend the Codes to 
prohibit entirely compensated NARs from representing parties in the DRS 
forum. In response, a number of commenters criticized compensated NARs' 
conduct in the DRS forum. Some commenters stated that some compensated 
NARs are, or work in coordination with, persons who are: (1) suspended 
or barred from the securities industry; (2) the subject of customer 
complaints; (3) associated with broker-dealers that were expelled from 
FINRA membership; or (4) guilty of criminal charges.\87\ Some 
commenters stated that compensated NARs may engage in improper business 
practices, such as cold calling investors with aggressive sales 
tactics, that would be prohibited if they were attorneys.\88\ Other 
commenters asserted that compensated NARs bring frivolous cases.\89\ A 
number of commenters also stated that compensated NARs mishandle or 
achieve worse outcomes or awards for their clients than attorneys, or 
that they were not competent, were inexperienced, or were a danger to 
investors or to the quality or integrity of the DRS forum.\90\ Several 
commenters expressed concerns that compensated

[[Page 71060]]

NARs charge clients non-refundable processing or investigation 
fees.\91\
---------------------------------------------------------------------------

    \87\ See Bakhtiari, Caruso, Dobin, Ilgenfritz, J. Kaplan, Meyer, 
M. Kaplan, PIABA and Shepherd.
    \88\ See Caruso, Meyer, M. Kaplan, PIABA and Wexler; see also 
Kohler.
    \89\ See Bandes, Commonwealth, Edwards, Lincoln Financial, M. 
Kaplan and SIFMA; see also Kohler.
    \90\ See Aidikoff, Caruso, Commonwealth, Cottone, Edwards, 
Feldman, Glick, Harris, J. Kaplan, Kohler, Nelson, PIABA, Port, 
Sutherland and Wexler.
    \91\ See, e.g., PIABA and Wexler. Other commenters stated that 
attorneys also charge upfront fees, in the form of a retainer. See, 
e.g., Neuman.
---------------------------------------------------------------------------

    Several commenters also described how clients, and others who deal 
with NARs, do not receive the benefit of the numerous protections that 
are available to persons who interact with attorneys, including 
disciplinary oversight, malpractice insurance, client trust accounts, 
rules of professional conduct, legal skills, legal education, or legal 
training.\92\ PIABA stated that, unlike attorneys, information about 
NARs' disciplinary history was not readily available. Some commenters 
described specific ethical duties that lawyers have that do not apply 
to NARs, including the duties of loyalty and honesty, to safeguard 
client funds and confidentiality.\93\ Some commenters stated that 
clients' communications with NARs were not protected by the attorney-
client privilege, a legal principle that prevents the disclosure of 
confidential communications with attorneys.\94\
---------------------------------------------------------------------------

    \92\ See Aidikoff, Bakhtiari, Caruso, Commonwealth, Dobin, 
Edwards, Feldman, Ilgenfritz, J. Kaplan, Lincoln Financial, M. 
Kaplan, Meyer, PIABA, Port, Sabino, SIFMA, St John's, Sutherland and 
Wexler; see also FSI. Other commenters stated that not all attorneys 
have malpractice insurance. See, e.g., Neuman.
    \93\ See Dobin, Feldman, Ilgenfritz, J. Kaplan, Nelson and 
PIABA; see also Caruso.
    \94\ See Dobin, Edwards and PIABA.
---------------------------------------------------------------------------

    FINRA's review of compensated NARs validated some of the 
commenters' serious concerns and, as previously noted, identified 
allegations about NAR misconduct.\95\ Accordingly, FINRA believes it is 
appropriate to disallow compensated NARs from representing parties in 
arbitrations and mediations in the DRS forum.
---------------------------------------------------------------------------

    \95\ See supra Item II.A.1. (discussing Background).
---------------------------------------------------------------------------

Compensated NARs Engage in the Unauthorized Practice of Law
    Many of the commenters who supported prohibiting compensated NARs 
argued that their representation of parties in the DRS forum 
constituted the unauthorized practice of law.\96\ These and other 
commenters stated that DRS arbitrations were complex or legal in 
nature, or had evolved to become more so over time, and that 
representing parties in DRS arbitration necessarily required legal 
skills, knowledge and training.\97\ For example, PIABA stated that 
``NARs interview clients, draft pleadings, develop litigation strategy, 
engage in discovery, negotiate settlements, engage experts, and conduct 
examination of witnesses at the arbitration hearing, all of which 
involves legal skill and knowledge.''
---------------------------------------------------------------------------

    \96\ See Caruso, Dobin, Feldman, Glick, Harris, Ilgenfritz, ISBA 
Business, ISBA Task, ISBA Unauthorized, Kohler, Nelson, PIABA, Port, 
Sabino, Sutherland and Wexler. Compare Steinmetz (stating that if 
any restrictions were imposed, they should be ``ones which prevent 
the unauthorized practice of law and to prevent fraud.'')
    \97\ See Aidikoff, Feldman, Glick, Ilgenfritz, ISBA Business, 
ISBA Task, ISBA Unauthorized, Kaplan, Kohler, Meyer, PIABA, Port, 
Sabino, SIFMA and Wexler.
---------------------------------------------------------------------------

    One commenter, Nelson, stated that the current prohibition on NARs 
representing parties when state law prohibits such representation was 
insufficient because the requirements of state law may be unclear.\98\ 
PIABA stated that some claimants have had their claims dismissed 
because their NARs were found to have engaged in the unauthorized 
practice of law, and suggested that NARs may be operating in states 
even where they are prohibited from doing so. Commonwealth and Wexler 
suggested that NAR firms were assisting customers with small claims 
decided ``on the papers'' without disclosing their representation of 
the party to the DRS forum.\99\ Harris and Nelson expressed concern 
that as arbitrators, they could be placed in the position of aiding the 
unauthorized practice of law when NARs represent parties in the DRS 
forum.
---------------------------------------------------------------------------

    \98\ See also PIABA (stating that most states have been silent 
on the issue of whether the appearance of NARs in an arbitration 
forum constitutes the unauthorized practice of law).
    \99\ Wexler stated that NAR firms had done so in order to avoid 
appearing in a state that would consider the appearance to be the 
unauthorized practice of law.
---------------------------------------------------------------------------

    FINRA shares commenters' concerns about compensated NARs engaging 
in the unauthorized practice of law. When represented by compensated 
NARs, forum participants do not receive the benefit of the type of 
specific professional qualification requirements, ethical rules, 
disciplinary processes and other protections that the relevant 
jurisdiction has determined should apply to attorney representation. In 
addition, as previously noted, customers have had their claims 
dismissed or delayed when compensated NARs engaged in the unauthorized 
practice of law.\100\
---------------------------------------------------------------------------

    \100\ See supra notes 20 and 21 and accompanying text.
---------------------------------------------------------------------------

(B) Comments Addressing Potential Benefits of NARs
Compensated NARs Fill a Void for Customers Who Cannot Find 
Representation
    In the Notice, FINRA requested comment on the factors that limit 
customers' access to attorney representation in arbitration. Several 
commenters stated that compensated NARs fill a void for customers who 
cannot find or afford counsel.\101\ Some commenters stated that 
attorneys are sometimes unwilling to take smaller cases because the 
prospects of recovery are low, or because potential claimants may not 
be able to afford the retainer fee.\102\ Other commenters stated that 
compensated NARs were willing to represent them at a lower cost than 
attorneys.\103\ CSAG and Neuman stated that customers who retain 
compensated NARs are often from small towns where there is limited 
access to counsel who are knowledgeable about securities arbitration.
---------------------------------------------------------------------------

    \101\ See CSAG, FSI, Georgia, Hambright, Neuman, Pace, Scronce, 
Steinmetz and Wall.
    \102\ See Hambright, Neuman, Scronce, Steinmetz and Wall.
    \103\ See, e.g., Abrahamsen, A. Lincoln, Inglis, Kabat and 
Scronce.
---------------------------------------------------------------------------

    One commenter, Georgia, stated that until SACs can receive 
sustained funding, ``entirely eliminating'' compensated NARs may cause 
more valid claims to go unfiled. Georgia recommended that FINRA work 
with SACs to identify funding sources to sustain and grow SACs. Pace 
stated that when SAC representation is ``not available due to lack of 
funding, jurisdictional issues, client preference, or other reasons, 
investors who cannot afford a private attorney may turn to NAR firms to 
assist them with their claims rather than bringing them pro se or not 
at all.''
    Twenty-two commenters, 15 of whom were clients of a single NAR 
firm, stated that compensated NARs provided effective representation in 
the DRS forum or described how they had done so in specific 
arbitrations.\104\ Some commenters who had retained the services of a 
compensated NAR suggested that they would not have obtained the same 
recovery if not for the compensated NAR's involvement.\105\ Kashouty 
stated that claimants and respondents should be allowed to make their 
own decision as to who will represent them, based on pecuniary or other 
considerations. Steinmetz and Neuman stated that it should be a 
customer's decision whether to retain a compensated NAR.
---------------------------------------------------------------------------

    \104\ See Abrahamsen, A. Lincoln, Bartness, Benade, Byrd, CSAG, 
Flack, Hambright, Inglis, Kabat, Kashouty, Kuefler, Mitchell, 
Mulligan, Neuman, Pate, Sacks, Scronce, Stein, Steinmetz, Stott and 
Wilson.
    \105\ See Flack, Hambright, Inglis and Mulligan.
---------------------------------------------------------------------------

    As noted above, FINRA has taken a number of steps to make 
arbitration and mediation accessible and affordable to parties, 
particularly those with small claims, and continues to look for ways

[[Page 71061]]

to improve the DRS forum in this regard.\106\ As also previously noted, 
despite the low numbers of compensated NARs, FINRA's review identified 
multiple allegations of improper conduct by compensated NARs, who are 
not subject to the specific and extensive professional qualification 
requirements, ethical rules, disciplinary processes and client 
protections that apply to attorneys.\107\ On balance, FINRA believes it 
is appropriate to disallow compensated NARs from representing parties 
in arbitrations and mediations in the DRS forum.
---------------------------------------------------------------------------

    \106\ See supra note 36. In recognition of the important role of 
SACs, FINRA supports SACs in a number of ways, including by 
leveraging its staff and arbitrator and mediator rosters to 
participate in law school events, such as judging in competitions, 
speaking in seminars, and conducting mock arbitrations and 
mediations.
    \107\ See supra Item II.A.1. (discussing Background). Notably, a 
FINRA arbitrator and securities dispute resolution expert has stated 
that FINRA has ``explored amending their rules to ban'' compensated 
NARs ``from representing parties as a means to prevent exploitation 
of investors, not as a means to decrease access to justice.'' See 
Jill Gross, Arbitration Archetypes for Enhancing Access to Justice, 
88 Fordham L. Rev., 2319, 2333, n.78 (2020).
---------------------------------------------------------------------------

Compensated NARs Educate Uninformed Customers
    In the Notice, FINRA requested comment on the factors that limit 
customers' access to attorney representation in arbitration. In 
response, several commenters stated that compensated NARs educate 
customers about their ability to arbitrate a claim in the DRS 
forum.\108\ Several investors who commented stated that they were 
unaware of having a valid claim until a NAR firm offered services 
through a cold call or unsolicited letter and reviewed their account 
statements.\109\ Steinmetz and CSAG stated that some customers with 
small claims against brokerage firms and associated persons might only 
be made aware of the availability of the DRS forum through the 
compensated NARs' marketing efforts.
---------------------------------------------------------------------------

    \108\ See A. Lincoln, Byrd, CSAG, Flack, Pate and Steinmetz.
    \109\ See A. Lincoln, Byrd, Flack, Hambright, Pate and Wilson; 
see also Stott.
---------------------------------------------------------------------------

    FINRA notes that it educates customers regarding dispute resolution 
and representation in the DRS forum through initiatives led by FINRA's 
Office of Investor Education (``OIE'') and the FINRA Investor Education 
Foundation (``Foundation'').\110\ For example, both OIE and the 
Foundation participate at in-person investor education events. 
Separately, the Foundation has published a guide for customers on how 
to prevent and resolve securities industry disputes,\111\ and OIE has 
provided guidance on what customers should consider when trying to 
decide whether to hire an attorney in arbitration or mediation.\112\ In 
addition, staff from FINRA's Securities Helpline for Seniors[supreg] 
\113\ have been trained to guide senior customers, and individuals 
caring for seniors, about the availability of mediation and the ability 
to file an arbitration claim in the DRS forum.
---------------------------------------------------------------------------

    \110\ OIE engages investors through in-person outreach and the 
development and dissemination of articles, alerts and tools. The 
Foundation, a subsidiary of FINRA with a separate governance 
structure, aims to build financial capability through education and 
research. More information can be found at https://www.finrafoundation.org.
    \111\ See Investor's Guide to Securities Industry Disputes: How 
to Prevent and Resolve Disputes with Your Broker (2009, rev. 2013; 
rev. 2017), https://www.finra.org/sites/default/files/Investors_Guide_to_Securities_Industry_Disputes.pdf. The Guide was 
authored by a SAC, Pace Investor Rights Clinic, through a grant from 
the Foundation.
    \112\ See Securities Arbitration--Should You Hire an Attorney? 
(Jan. 3, 2019), https://www.finra.org/investors/highlights/securities-arbitration-should-you-hire-attorney. The article was co-
authored by FINRA staff and The PIABA Foundation and provides 
guidance on how to find an attorney, including questions to ask when 
screening attorneys. The article also provides cautionary language 
about compensated NARs and notes the important role of SACs in 
representing customers with small claims.
    \113\ FINRA's Securities Helpline for Seniors[supreg] provides a 
toll-free number that senior investors can call to get assistance 
from FINRA or raise concerns about issues with brokerage accounts 
and investments. More information can be found at https://www.finra.org/investors/highlights/finra-securities-helpline-seniors.
---------------------------------------------------------------------------

    FINRA is concerned that compensated NARs' interactions with 
customers are not subject to regulation like the state disciplinary 
rules on lawyer advertising and solicitation,\114\ and that this also 
is not an area that FINRA regulates. FINRA is concerned with 
allegations that some compensated NARs have misrepresented or willfully 
failed to disclose important facts to their clients. For example, FINRA 
is aware of compensated NARs who have omitted their disciplinary 
history in order to represent clients or assured customers that they 
would recover their investments despite almost never doing so.\115\ 
Compensated NARs' largely unregulated access to potential claimants is 
another reason that FINRA believes that it would be appropriate to 
disallow compensated NARs from representing parties in arbitrations and 
mediations in the DRS forum.
---------------------------------------------------------------------------

    \114\ See supra note 17.
    \115\ See, e.g., PIABA; Chambliss, supra note 9 and accompanying 
text.
---------------------------------------------------------------------------

(C) Comments Supporting Restrictions or Conditions on Representation by 
Compensated NARs
    In the Notice, FINRA requested comment on alternatives to the rule 
proposal that FINRA should consider to reduce the incidence of harmful 
activities by compensated NARs while ensuring customers are able to 
retain representation. In response, several commenters suggested 
restrictions or conditions on the ability of compensated NARs to 
represent parties in the DRS forum. Four commenters recommended that 
FINRA allow compensated NARs to continue to represent parties in the 
DRS forum in smaller or less complicated cases.\116\ Nine commenters 
recommended that FINRA exercise some additional form of oversight over 
compensated NARs.\117\ These commenters suggested that FINRA could: (1) 
train or certify compensated NARs to meet standards, skills or 
experience criteria; (2) require compensated NARs to make disclosures 
to their clients that are approved by FINRA; (3) require compensated 
NARs to adhere to a fiduciary standard; (4) require compensated NARs to 
carry insurance; or (5) limit the fees compensated NARs charge clients. 
FSI recommended that if FINRA chose this approach, it should provide a 
list of qualified compensated NARs on its website or to claimants. 
SIFMA, however, stated that FINRA has no current means to measure or 
ensure the competency of compensated NARs and it should not put itself 
in the business of doing so.\118\ Pace stated that NAR firms should 
provide documentation that they are not in violation of state law.
---------------------------------------------------------------------------

    \116\ See BFS, Cornell, Sec. Arb. Commentator and Wall.
    \117\ See Benade, CSAG, FSI, Georgia, Pace, Sacks, Starr, Wall 
and Wood.
    \118\ M. Kaplan stated that FINRA has no jurisdiction over NAR 
firm conduct.
---------------------------------------------------------------------------

    FINRA believes that it would be impractical to create its own 
system of training, certifying or otherwise overseeing compensated 
NARs.\119\ FINRA further notes that it does not have direct authority 
to investigate or discipline compensated NAR conduct.\120\
---------------------------------------------------------------------------

    \119\ See supra Item II.B (discussing Alternatives Considered).
    \120\ See supra note 19.
---------------------------------------------------------------------------

(D) Commenters Suggesting That FINRA Should Broaden Its Review
    In the Notice, FINRA requested comment on the other types of 
representation or assistance investors retain in arbitration. In 
response, several commenters recommended that FINRA

[[Page 71062]]

conduct additional study on compensated NARs. Cornell commented that 
FINRA should differentiate the impact of compensated NARs on 
arbitration versus mediation and provide comparable data on the conduct 
of attorneys, compensated NARs and SACs in the DRS forum. Sacks 
similarly suggested that FINRA provide comparable data on the 
performance of attorneys and compensated NARs in representing their 
clients in the DRS forum. CSAG stated that FINRA should send 
questionnaires to customers that have used the services of compensated 
NARs to seek their input and the results of any settlements. Pace 
recommended that FINRA's Foundation fund further research into whether 
customers fare better when represented by a compensated NAR than when 
representing themselves.
    As previously noted, FINRA has identified several allegations of 
misconduct by compensated NARs and harm to parties from compensated 
NARs' unauthorized practice of law. FINRA does not believe that it 
would be practical to draw conclusions from the relative performance of 
compensated NARs and attorneys at this time. Potential differences in 
the characteristics of customer claims and the confidentiality of 
settlements makes direct comparisons difficult, as does the low number 
of compensated NARs currently practicing in the DRS forum.
(E) Other Comments
    In response to the Notice, some commenters recommended that instead 
of focusing on compensated NARs, FINRA should focus on preventing or 
remediating abuses by brokerage firms and associated persons.\121\ Five 
commenters recommended that FINRA focus on the issue of unpaid customer 
arbitration awards by requiring brokers to carry insurance or by 
creating a restitution fund.\122\ Neuman and Stein criticized the DRS 
forum for becoming too expensive and complicated for customers.
---------------------------------------------------------------------------

    \121\ See CSAG, Stein and Stout.
    \122\ See Byrd, Kabat, Neuman, Pate and Wilson.
---------------------------------------------------------------------------

    Although these comments are beyond the scope of the proposed 
rulemaking, FINRA notes that it has amended its Membership Application 
Program rules to help further address the issue of unpaid arbitration 
awards.\123\ FINRA has also expanded a customer's options to withdraw 
an arbitration claim if a member or an associated person becomes 
inactive before a claim is filed or during a pending arbitration.\124\ 
In addition, FINRA has adopted rules to address brokers with a 
significant history of misconduct and the broker-dealers that employ 
them.\125\ FINRA has also adopted new rules to address firms with a 
significant history of misconduct.\126\ In addition, to provide further 
transparency regarding unpaid awards:
---------------------------------------------------------------------------

    \123\ The amendments help prevent a member firm with substantial 
arbitration claims from avoiding payment of potential awards or 
settlements by shifting its assets to another firm and closing down. 
See Securities Exchange Act Release No. 88482 (March 26, 2020), 85 
FR 18299 (April 1, 2020) (Order Approving File No. SR-FINRA-2019-
030); Regulatory Notice 20-15 (May 2020) (announcing the effective 
date of September 14, 2020 for the amendments discussed in File No. 
SR-FINRA-2019-030).
    \124\ In addition, the amendments allow customers to amend 
pleadings, postpone hearings, request default proceedings and 
receive a refund of filing fees in these situations. See Securities 
Exchange Act Release No. 88254 (February 20, 2020), 85 FR 11157 
(February 26, 2020) (Order Approving File No. SR FINRA-2019-027); 
Regulatory Notice 20-11 (April 2020) (announcing the effective date 
of June 29, 2020 for the amendments discussed in File No. SR-FINRA-
2019-027).
    \125\ See Securities Exchange Act Release No. 90635 (December 
10, 2020), 85 FR 81540 (December 16, 2020) (Order Approving File No. 
SR-FINRA-2020-011, as Modified by Amendment No. 1); Regulatory 
Notice 21-09 (March 2021) (announcing the effective dates of April 
15, 2021, May 1, 2021, June 1, 2021 and September 1, 2021 for the 
respective amendments approved in File No. SR-FINRA-2020-011); see 
also Securities Exchange Act Release No. 92710 (August 19, 2021), 86 
FR 47527 (August 25, 2021) (Order Approving File No. SR-FINRA-2021-
011); Securities Exchange Act Release No. 92793 (August 27, 2021), 
86 FR 49394 (September 2, 2021) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2021-020).
    \126\ See Securities Exchange Act Release No. 92525 (July 30, 
2021), 86 FR 42925 (August 5, 2021) (Order Approving File No. SR-
FINRA-2020-041, as Modified by Amendment Nos. 1 and 2); see also 
Securities Exchange Act Release No. 92525 (July 30, 2021), 86 FR 
49589 (September 3, 2021) (Order Approving File No. SR-FINRA-2020-
041, as Modified by Amendment Nos. 1 and 2) (Correction); Regulatory 
Notice 21-34 (September 2021) (announcing the effective date of 
January 1, 2022 for the amendments approved in File No. SR-FINRA-
2020-041); Securities Exchange Act Release No. 95048 (June 6, 2022), 
87 FR 35582 (June 10, 2022) (Notice of Filing and Immediate 
Effectiveness of File No. SR-FINRA-2022-014); Securities Exchange 
Act Release No. 96798 (February 3, 2023), 88 FR 8494 (February 9, 
2023) (Order Approving File No. SR-FINRA-2022-015); Regulatory 
Notice 23-07 (May 2023) (announcing the effective date of June 1, 
2023 for the amendments approved in SR-FINRA-2022-015).
---------------------------------------------------------------------------

     FINRA issued a Discussion Paper that identifies possible 
measures that could be taken to either enhance the resources to pay 
such awards or provide greater incentives to pay such awards.\127\
---------------------------------------------------------------------------

    \127\ See Discussion Paper, FINRA Perspectives on Customer 
Recovery, https://www.finra.org/sites/default/files/finra_perspectives_on_customer_recovery.pdf.
---------------------------------------------------------------------------

     FINRA makes data on unpaid customer arbitration awards for 
the past five years available on its website.\128\
---------------------------------------------------------------------------

    \128\ See Statistics on Unpaid Customer Awards in FINRA 
Arbitration, https://www.finra.org/arbitration-and-mediation/statistics-unpaid-customer-awards-finra-arbitration.
---------------------------------------------------------------------------

     FINRA also makes available in one place on its website a 
list of firms and individuals responsible for unpaid customer 
arbitration awards.\129\
---------------------------------------------------------------------------

    \129\ See Member Firms and Associated Persons with Unpaid 
Customer Arbitration Awards, https://www.finra.org/arbitration-and-mediation/members-firms-and-associated-persons-unpaid-customer-arbitration-awards. The list includes the names of firms and 
individuals whose FINRA registration has been terminated, suspended, 
canceled or revoked, or who have been expelled from FINRA. These 
firms and individuals are no longer FINRA members or associated with 
a FINRA member, but they may be operating in another area of the 
financial services industry where FINRA registration is not 
required. The list also shows those firms and individuals with 
unpaid arbitration awards, but where bankruptcy is a defense to non-
payment. These firms and individuals may still be active in the 
brokerage industry due to the bankruptcy defense to non-payment.
---------------------------------------------------------------------------

    Thus, FINRA continues to focus on this important issue.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FINRA-2023-013 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2023-013. This 
file number should be included on the subject line if email is used. To 
help the

[[Page 71063]]

Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's internet website (https://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. Copies of such filing also will be available for inspection and 
copying at the principal office of FINRA. Do not include personal 
identifiable information in submissions; you should submit only 
information that you wish to make available publicly. We may redact in 
part or withhold entirely from publication submitted material that is 
obscene or subject to copyright protection. All submissions should 
refer to File Number SR-FINRA-2023-013 and should be submitted on or 
before November 3, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\130\
---------------------------------------------------------------------------

    \130\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 2023-22612 Filed 10-12-23; 8:45 am]
BILLING CODE 8011-01-P