InvestmentNews (February 8, 2018) - Brokerage regulator seeks to involve SEC, Congress in solutions
More than a quarter of arbitration awards have gone unpaid in most of the last several years, according to Finra data released Thursday.
In a 24-page report and supplemental information, the Financial Industry Regulatory Authority Inc., the broker-dealer self-regulator, provided a detailed analysis of harmed investors being unable to collect after winning arbitration cases.
The Finra data show that between 2012 and 2016, anywhere from 22% to 30% of cases in which damages were awarded went unpaid. Over that same period, 66% to 71% of cases were settled, and the number of cases closed hit a high of 3,187 in 2012 and low of 2,265 in 2015.
The amount of unpaid arbitration awards ranged from $14 million in 2016, out of $119 million in total awards, to $75 million in 2013, out of $181 million in total awards.
Finra has been under pressure for years on the issue from investor advocates, such as the Public Investors Arbitration Bar Association, and from lawmakers, including Sen. Elizabeth Warren, D-Mass.
Among the remedies for unpaid arbitration outlined in the document include raising capital requirements, expanding Securities Investor Protection Corp. coverage, requiring brokerages to carry unpaid-arbitration insurance, creating a brokerage industry fund separate from SIPC to pay claims and amending the bankruptcy code.
The problem of unpaid claims cuts across the financial industry, and the solution requires the involvement of the Securities and Exchange Commission, Congress and other regulators, Finra said. It plans to convene a meeting with regulators and policymakers.
"The problem of customers not being able to collect on an arbitration award or judgment is not unique to the brokerage industry, and it would be useful to consider in a more holistic manner the different dispute resolution systems and related regulatory frameworks applicable to different areas of the financial services industry," the Finra report states.
Also on Thursday, Finra issued for public comment a rule proposal that would prevent a broker from switching firms, and firms from selling assets, to avoid paying arbitration awards.
Finra runs the arbitration systems that adjudicates customer and broker disputes. Every brokerage contract includes mandatory arbitration. In its report Thursday, it provided data on unpaid claims for the first time.
"This is an unprecedented level of transparency," said George Friedman, who ran Finra arbitration from 1998-2013. "They're admitting there's a problem, laying it out and convening a high-level group to address potential solutions."
Andrew Stoltmann, a securities attorney and PIABA president, credited Finra for moving away from its "ostrich-with-its-head-in-the-sand approach" to unpaid claims.
"Finra is finally trying to get ahead of this issue and frame the debate on its own terms," Mr. Stoltmann said. "Finra clearly is attempting to push this hot potato on to the laps of the SEC and Congress."
That debate will continue, as advocates push Finra toward their preferred solution.
"The simplest, most effective way to rectify this problem is an industry-funded unpaid arbitration pool," Mr. Stoltmann said.
But the Financial Services Institute, which represents independent broker-dealers, doesn't want responsible brokerages on the hook to cover those who shirk paying arbitration awards.
"The solution to this problem should not require those who honor their obligations to bear the burden of the bad acts of those that left the industry or are otherwise avoiding their responsibilities," David Bellaire, FSI executive vice president and general counsel, said in a statement.
A lawyer who represents brokerages in arbitration claims also opposes the unpaid-claims pool.
"It would be like a tax on the securities industry, and that would raise expenses," said Barry Temkin, a partner at Mound Cotton Wollan & Greengrass.
Mr. Temkin said the Finra report "exaggerates the problem," and rules already in place at Finra bolster investors chances to recover. For instance, Finra bars from the industry firms and registered representatives who fail to pay arbitration claims.
"Finra has real enforcement teeth that give claimants in the Finra forum an advantage that they would not have in court," Mr. Temkin said.