SEC Adopts Securities Arbitration Fraud Intervention Rule

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SEC Adopts Securities Arbitration Fraud Intervention Rule

The SEC adopted a rule that will allow securities arbitrators to immediately disclose frauds that have the potential to threaten the investing public when they learn of such frauds in the midst of a case. The SEC’s acceptance of the rule ends years of debate over implementing such a rule that was first proposed after massive Ponzi schemes run by Bernard Madoff and R. Allen Stanford.

FINRA has long been a proponent of adding such a rule. The regulatory authority has called for a “mid-case referral” rule since the turn of the decade. The SEC stated that allowing securities arbitrators to disclose serious concerns in the midst of a case pertaining to potential frauds detrimental to the investing public provides a needed method of alerting FINRA of these potential threats.

The rule, as of now, states that arbitrators must wait until the conclusion of a case to notify FINRA.

Attorneys for brokerages were concerned about how FINRA would handle arbitrators who reported potential frauds. They believed that arbitrators who proceed with a case after alerting FINRA of their concerns would be biased against particular parties having already made up their minds about the parties before hearing all of the relevant evidence. Finding and implementing a replacement arbitrator would prolong cases and make them more expensive.

FINRA had already proposed a similar rule in January but withdrew it after a number of attorneys expressed concern. The agency filed a second proposal with the SEC in February.

FINRA does note that the new rule will potentially result in delays and increased costs in some cases. The SEC believes, however, that the rule is written in such a way that it would only be invoked in rare circumstances, pointing out that to invoke the rule arbitrators must believe that the conduct involved poses a serious threat that is likely to harm investors unless immediate action is taken.

As of now, it is unknown when the rule will become effective.

If you or someone you know has lost money as a result of an investment or Ponzi scheme, please contact Richard Frankowski at 888-741-7503 to discuss your potential legal remedies or complete the contact form.

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