On September 17, 2010, the SEC published a notice to solicit comments on a proposed rule change originally submitted by FINRA on July 12, 2010. Rule 12104(b) of the Code of Arbitration Procedure for Customer Disputes and Rule 13104(b) of the Code of Arbitration Procedure for Industry Disputes currently allow for referrals to FINRA for disciplinary investigation any matter that has come to the arbitrator's attention only at the conclusion of an arbitration. The proposed rule change would allow an arbitrator to refer to FINRA any matter or conduct that has come to the arbitrator’s attention during the prehearing, discovery, or hearing phase of a case, which the arbitrator has reason to believe poses a serious, ongoing, imminent threat to investors that requires immediate action. The proposed rule would state further that arbitrators should not make mid-case referrals based solely on allegations in the statement of claim, counterclaim, cross claim, or third-party claim.
FINRA's purported basis for the rule change is that, in light of recent well-publicized securities frauds that resulted in harm to investors, FINRA has reviewed its rule on arbitrator referrals and determined that it should be amended to permit arbitrators to make referrals during an arbitration proceeding. FINRA believes that restricting arbitrators from making referrals until the conclusion of an arbitration may hamper FINRA’s efforts to uncover fraud as early as possible. Therefore, FINRA proposes to amend Rules 12104 and 13104 of the Codes to permit referrals to the Director during the prehearing, discovery, or hearing phase of an arbitration proceeding.
A complete copy of the notice can be found here.