The FINRA Codes of Arbitration and Mediation Procedure (“Codes”) permits non-attorney representation of clients in securities arbitration and mediation subject to certain exceptions. FINRA is currently conducting a review of the efficacy of continuing to allow such representation. Typically, while some parties may be represented by relatives or friends who assist with case preparation or presentation, many engage non-attorney representation firms (“NAR firms”), who provide public investors an alternative to representation by attorneys in disputes between investors and broker-dealers.
Although NAR firms are an alternative to representation by attorneys, NAR firms are not subject to the same professional rules or guidelines, nor are they subject to malpractice insurance requirements. As a result, relative to representation by attorneys, investors who retain representation by NAR firms may be more likely to experience harm at the hand of their representative and have less legal recourse to receive compensation for that harm. Investors may also not be aware of the absence of these protections, and therefore may not properly evaluate the benefits and costs of representation by NAR firms.
To this end, the Dispute Resolution Task Force in its Final Report and Recommendations recommended that FINRA conduct a study to determine, among other matters, whether NAR firms are performing competently. FINRA’s review revealed that there are a small number of NAR firms regularly practicing in the forum. Forum users have reported that the following NAR firm activities have taken place at the forum:
- Using the forum as a vehicle to employ inappropriate business practices;
- Requiring retainer agreements that reflect a non-refundable fee of $25,000;
- Representing parties in hearing locations where state law prohibits such representation or, in the alternative, handling only small claims (decided on written submissions) to avoid hearing locations in which the unauthorized practice of law would become an issue;
- Signing required arbitration submission agreements with the name of the NAR firm to avoid naming an individual representative who could be engaging in the unauthorized practice of law;
- Pursuing frivolous or stale claims to attempt to elicit settlements; or
- breaching confidentiality provisions in settlement agreements by posting a picture of the settlement check to market the NAR firm’s services.
FINRA believes that further restricting the representation of parties by NAR firms could benefit investors by reducing their exposure to firms that provide fewer client protections or redress options for malpractice. The absence of similar rules and requirements could result in a higher incidence of harmful practices, and thereby impose additional costs on investors when retaining representation. To the extent that harmful activities hinder the dispute resolution process, then broker-dealers would also incur additional legal expense and time to resolve disputes. Further restrictions on NAR firms would thereby also benefit broker-dealers through the reduction of these potential costs.
Alternatively, further restricting the representation of parties by NAR firms could also impose additional costs. A primary cost could be a decrease in the ability of some investors, including investors with smaller claims, to find other beneficial sources of representation. The available alternatives to NAR firms may not be as beneficial as representation by NAR firms, even if there is a higher risk of negligent representation or fraud, which may therefore impose greater costs on investors.
To address these issues, FINRA has issued a Regulatory Notice which outlines FINRA’s review of NAR firms’ activities at the forum and seeks responses to questions related to forum users’ experiences with NAR firms.