InvestmentNews (February 7, 2020) – Rule would restrict movement of brokers or firms’ assets if arbitration claims are pending

A Finra proposal that would restrict registered representatives from moving to a new firm and brokerages from transferring assets to avoid paying arbitration awards has moved a step closer to enactment.

The Financial Industry Regulatory Authority Inc. filed the proposal with the Securities and Exchange Commission in December. The SEC published it in the Federal Register on Dec. 30 and asked for public comments.

Earlier this month, Finra responded to the comments and made a technical correction to the proposal. The SEC oversees Finra and must approve the rule before it can go into effect.

Under the proposal, Finra would deny a new membership application if a brokerage or its representatives have pending arbitration claims where there is a concern about payment of potential awards or settlements.

The proposal also would force firms with substantial unpaid arbitration awards to submit an application for continuing membership and undergo heightened Finra scrutiny if they attempt to shift assets, management or owners to another firm and close down.

“Finra believes that these proposed amendments to select portions of the [application] rules would enable Finra to take a stronger approach to addressing the issue of pending arbitration claims, as well as arbitration awards and settlement agreements related to arbitrations that have not been paid in full in … connection with the application review process,” Finra said in the proposal. “In addition, the proposed amendments would enable Finra to consider the adequacy of the supervision of individuals with pending arbitration claims.”

In a 2018 study, Finra said more than a quarter of arbitration awards went unpaid between 2012 and 2016. The brokerage industry self-regulator has come under pressure from Congress and investor advocates, such as the Public Investors Arbitration Bar Association, to help harmed investors collect after winning arbitration cases.

Andrew Stoltmann, a Chicago securities attorney and PIABA member, said addressing the problem through the Finra membership application process is another of Finra’s “piecemeal steps.”

“Instead of performing surgery, they want to cure the problem with Band-Aids,” Mr. Stoltmann said. “It barely nibbles at the edge of the problem. It appears to be more of an attempt to pacify Congress so Finra can say, ‘Look, we’re addressing the issue.’”

He added: “Net-net, it’s a good thing, but it’s nothing we’re all getting excited about.”

Finra defended its efforts to address unpaid arbitration.

“FINRA has taken many steps — including the [Member Application Process] proposal — to use the tools within our power to help customers recover the awards they are owed,” Finra spokeswoman Michelle Ong wrote in an email. “This issue is not unique to FINRA’s forum or the broker-dealer industry.”