The Public Investors Advocate Bar Association (PIABA) today slammed the recent decision by the Financial Industry Regulatory Authority (Finra) to approve a $50 million rebate to its member firms instead of using the money to compensate investors who were stiffed by firms and advisors after winning their arbitration claims.
Finra began distributing the rebate payments in early July to broker-dealers that pay for Finra membership and regulation.
Finra said it its recent budget report that its board approved the rebate based on “updated projections regarding Finra’s revenues, expenses and overall market conditions.” But investor advocates blasted the nongovernmental self-regulatory organization today in a press release and said they were stunned that the regulator chose to send tens of millions back to firms rather than help fix a problem it has been accused of ignoring for more than 25 years.
PIABA argued that the rebate could have been used instead to create an unpaid arbitration award fund. Some 20% of total award dollars are left unpaid, including $51 million in 2012 and $20.6 million in 2017, according to the group.
“It is absolutely critical that investors be made whole when they prevail in arbitration. A win on paper is meaningless if it doesn’t result in actual compensation,” Adam Gana, president of PIABA and managing partner of Gana Weinstein LLP, told Financial Advisor Magazine. “The unpaid arbitration award crisis undermines the integrity of Finra’s entire dispute resolution process and shatters public confidence in Finra’s ability to protect investors and the industry to self-regulate.”
Finra did not respond with a comment by press time.
The SRO has historically resisted creating an unpaid arbitration award fund, arguing it would require contributions from member firms who oppose subsidizing obligations of bad actors. The regulator has also said it lacks statutory authority to impose or manage such a fund without direction from the SEC or Congress, and warns it could encourage firms to act irresponsibly. Instead, Finra has favored preventative measures like tighter supervision and firm vetting over post-award compensation.
Gana said the issue “a multimillion-dollar crisis. It’s clear that this is not the way to promote Finra’s mission of protecting investors and promoting market integrity.”
PIABA Vice President Joe Wojciechowski said the rebate raises serious questions about Finra’s budget discretion and its priorities.
“Finra is a quasi-governmental entity and apparently has $50 million lying around it can send to member firms. That money could have been used to see an unpaid award fund and put this issue to bed forever,” said Wojciechowski, managing partner at the Stolt Law Firm. “An investor should be given whatever their award is. They proved their case in Finra Dispute Resolution, won it and then get stiffed.”
PIABA has long argued that an unpaid arbitration award fund is the best way to address unpaid awards. But until now, Finra has maintained that there is no feasible way to fund it. That excuse, PIABA says, no longer holds water.
“Now you see Finra apparently sitting on a pile of money and giving it back to the industry,” Wojciechowski said.
He called Finra’s decision a “monumental slap in the face” to investors and to PIABA. The Government Accountability Office first flagged the issue of unpaid arbitration awards back in 2000.
Wojciechowski said PIABA is pressing the SEC and lawmakers for answers. “We plan to make a big stink on this with the SEC and Congress in the hopes that we can get some traction on the unpaid arbitration award fund. It would have to be done via the SEC and the impetus of that would have to be congressional pressure via threat of legislation or an actual bill in order to get Finra to act,” he said.
He also questioned the lack of transparency surrounding Finra’s rebate authority. “Finra doesn’t have to seek approval from anyone with regard to budget issues. We’re looking to find out how mechanically this happened. What discretion does Finra have to rebate money? It’s part of a broader push by Finra to make the industry as happy as they can—a kinder, gentler Finra.”