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Should Non-Attorneys Represent Investors in Arbitration? FINRA’s Asking

The regulator began a comment period on the topic Wednesday.

The Financial Industry Regulatory Authority is considering whether non-attorneys should be able to represent investors in arbitration.

FINRA currently allows non-attorney representatives, or NARs, to work with public investors filing securities arbitration claims and during mediation. The NARs are typically an alternative to hiring an attorney for disputes between investors and broker/dealers, FINRA says.

But the efficacy of NARs is being reexamined after the regulator’s Dispute Resolution Task Force recommended a study of them be conducted. That study showed there are a small number of NARs firms regularly representing investors. However, some of their practices raised eyebrows.

The notice of the comment period said NARs use arbitration to “employ inappropriate business practices.” They require non-refundable retainer agreements as much as $25,000 and pursue frivolous or stale claims to attempt to elicit settlements. Others are operating illegally by practicing in hearing locations where state law prohibits such representation. They get around that by taking only small claims decided on written submissions.

NARs were also observed posting photos of settlement checks to market their services, a breach of confidentiality provisions in settlement agreements.

These representatives are currently allowed because they serve investors with smaller claims (those of $100,000 or less) who seek representation but can’t afford an attorney or find one that will take their case.

Investors can benefit from their expertise, according to FINRA’s notice. But they aren’t held to professional rules and guidelines like attorneys. NARs firms don’t have the same malpractice insurance requirements either.

“I give FINRA credit for attempting to address the NAR issue because these guys are a menace to retail investors,” said Andrew Stoltmann, the president-elect of the Public Investors Arbitration Bar Association (PIABA) and investment fraud attorney at the Stoltmann Law Offices.

He said attorneys probably won’t care whether NARs are banned or more heavily regulated by FINRA. But the brokerages don’t like them because they frequently lack an understanding of arbitration proceedings and cause “chaos” for the clients they represent.

“They are not lawyers,” Stoltmann said. “But they are going up against the best lawyers money can buy on the defense side.”

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