Wall Street's industry-funded watchdog is optimistic that its plan to let securities arbitrators immediately report frauds they learn about in the middle of a case will finally take effect.

"I feel comfortable that the rule is likely to go forward," Linda Fienberg, the Financial Industry Regulatory Authority's arbitration head, told reporters in New York on Wednesday. The watchdog runs its own arbitration system, which is used by brokerages and investors to resolve legal disputes.

The U.S. Securities and Exchange Commission is now taking a close look at the rule Finra wants to impose, the most recent development in a four-year process. The rule, if approved, would let arbitrators stop in the middle of a case to tell Finra's staff about possible frauds they learn of that could hurt the investing public.

Finra's staff would then decide whether its enforcement unit or the SEC should investigate the problem. Arbitrators must now wait until a case ends to air concerns.

The proposal dates to 2010, sparked by multibillion-dollar Ponzi schemes orchestrated by Bernard Madoff and R. Allen Stanford.

But it is not without controversy.

Lawyers for brokerages and investors worry how Finra would handle arbitrators who report suspicious behavior. Arbitrators who continue in a case after referring concerns to Finra, the lawyers say, may show bias against certain parties because they already may have come to conclusions before hearing all the evidence. That could make it easier for one party to later challenge a ruling.

Getting a replacement arbitrator up to speed also might prolong a case and increase legal costs.

Making arbitrators wait until the end of a case could allow massive frauds to operate for months to more than a year without intervention, Fienberg said on Wednesday. They should be able to speak up immediately, Fienberg said. The new authority, if approved, would apply only in situations where many investors are at risk.

Finra has tweaked the plan in response to the concerns. It resubmitted a revised version to the SEC in February.

Fienberg says he believes that arbitrators would rarely use their mid-case referral authority, given that frauds such as the one perpetrated by Madoff and Stanford Ponzi are rare.

But those situations would be more devastating if they become evident and arbitrators must remain quiet for months, Fienberg said. "That's not a happy prospect for regulators to have that information in its files," Fienberg said.

The SEC must review all changes to Finra rules, but its procedure for this proposal is more involved than usual, according to George Friedman, an arbitration consultant and former director of Finra's arbitration unit.

Agency staff will typically approve a new rule after collecting written views from the public and asking Finra to respond, according to Friedman. But this time, the agency itself has concerns about the proposal that it wants to address, Friedman said. Among them: that the plan protects investors, the SEC wrote in a notice on May 20.

The SEC can ultimately reject the plan. Its comment period for the proposed rule ends on June 26.