In Regulatory Notice 14-42 (“RN 14-42”), FINRA announced amendments to the FINRA Customer and Industry Codes increasing an arbitrator’s authority to make referrals to FINRA enforcement during the course of an arbitration hearing. Previously, the referral protocol limited the ability of a FINRA arbitrator to make referrals until the conclusion of a matter. Post-matter referrals are still allowed and encouraged under standard protocol, however, effective October 27, 2014, the amendment will enable arbitrators to make mid-case referrals during a proceeding when they have reason to believe a matter poses serious threats (ongoing or impending) likely to harm investors. This proposed rule change stems from FINRA’s concern that the pre-amended rules hindered FINRA’s efforts to uncover investor threats as early as possible.
RN 14-42 discusses the disclosure process for such mid-case referrals. The arbitrator must disclose the referral to the parties, to which the parties have no more than three days to request that the referring arbitrator recuse himself/herself. The parties forfeit the right to request recusal if this deadline is not met. Arbitrators will continue to maintain discretion to decide whether or not to withdraw from a case upon a recusal request.