NASD Rule Proposal Effectively Prohibits Non-Attorney Representation in Arbitration?

Text of Proposed Rule Change

The NASD is proposing to modify its arbitration and mediation rules regarding the representation of parties in arbitration. The rule change will continue to allow individuals, corporations and other entities to represent themselves, and adds language that provides that an admitted attorney can represent a party in an abitration.

The comments to the rule change state that the change is to acknowledge a long standing practice where out of state attorneys represent parties in arbitration. Some states (California and Florida) have taken issue with the practice in extremely limited circumstances, and the multi-jurisdictional practice of law is the subject of many studies, and debates, with many jurisdictions changing their rules to allow the practice.

However, the actual rule change will do a bit more than simply acknowledge an existing practice, for the language of the rule change provides authority for an argument that non-attorneys cannot represent parties in arbitrations. The rule change will remove from arbitration proceedings the use of "arbitration representatives" or "arbitration consultants" who act as representatives to parties in arbitration, but who are not attorneys. A controversy has been brewing for a number of years over the practice of allowing such representation, and a few states have themselves prohibited the practice.

While the NASD did not state that this was the purpose behind the rule, they were clearly concerned with the problem of non-attorney representatives. In a footnote the NASD commented "NASD continues to be concerned about the on-going problems that are caused by the practice of non-attorneyrepresentatives in the forum. These problems, which have been well documented, may have negativeimplications for parties in arbitration."

While there are certainly some non-attorneys who can adequately represent a party in an arbitration, the group as a whole simply does not have the training that attorneys have. Further, such representation is typically viewed as unauthorized practice of law, which is illegal in virtually every jurisdiction that I am familiar with. Putting aside the theoretical considerations, such non-attorneys often have no legal training (I am aware of one or two who are former brokers who were expelled from the industry!), are not bound by the licensing and ethical rules which govern attorneys, and their clients do not benefit from such recognized protections as the attorney-client privilege and the attorney work product doctrine.

I am sure that we will hear arguments that there are good non-lawyers representing parties, and terrible attorneys doing so, and that the license to practice law is not a guarantee of competence. While it is certainly not a guarantee, it is demonstrative of a basic skill level, a measure of legal training, and the ability to rely on the rules which govern the practice of law, something which is clearly lacking when a party trusts his case to a non-attorney.

To quote the NASD - "NASD believes that implementing this standard of practice in its arbitration forum will ensure that a party’s representative will possess an adequate level of skill and training in providing legal services to investors, which will ultimately enhance the integrity of the arbitration process."

With that stated purpose, and the text of the rule itself, we are witnessing the end of the non-attorney arbitration representative.

U-5s in the Spotlight Again

Those of us who spend our days representing securities brokers and firms are aware of the recent, and concerning, drive for viligence in U-5 filings. NASD and NYSE audits have been focusing on CRD reporting for well over a year, and a number of firms have been fined for failing to timely update CRD records of their brokers.

Perhaps the most glaring, or public, example of the failure to file issue came last year, when the NASD suspended the ability of three of the country's largest firms from hiring new brokers because of their CRD failure. And to make sure they got everyone's attention, the NASD slapped the three firms with in excess of $4 million in fines.

And they cited and fined another 27 firms $7 million for similar violations.

This apparent widespread failure to update CRD records is obviously a serious issue, and one wonders how so many firms could have gotten it so wrong.

But it now appears that some firms are using the stepped up enforcement efforts, and their own failings, to their advantage. They are using the fines and enforcement efforts to mark up the licenses of departing brokers, claiming that the NASD and the NYSE are forcing them to do so.

On Wall Street magazine has taken up the issue, and in a lengthly analysis of the problem has disclosed an apparently widespread practice by firms to mark up a departing broker's license, using these failure to report complaints as the justification.

The article notes that brokers are fighting back, and confirms that there is a remedy for a false U-5 filing, detailing instances where brokers have recovered damages, and reformation of their U-5s from their firms.

Firms and compliance departments are certainly between a rock and a hard place, risking NASD sanctions if they don't report, and broker arbitrations when they do. Firms need to be viligent and to devote the time to insure that their viligent filings are accurate, and brokers need to know that there is a remedy for the conduct of a "rogue firm."