Financial Advisor (November 1, 2021) - Brokers and advisors who close up shop and declare bankruptcy to sidestep paying arbitration awards to the investors they defrauded are the scourge of every investor advocate attorney, and a particular focus for Michael Edmiston, new president of the Public Investor Advocate Bar Association (PIABA).
A former attorney with both Finra’s predecessor NASD and JAMS Arbitration Services and a member of Finra’s National Arbitration and Mediation Committee, Edmiston has seen the challenges with securities arbitration firsthand, but one case stuck with him.
“About 10 years ago, I represented a vibrant retired lady who owned and operated donut shops in California. She was convinced by a broker to invest her IRA and much of her savings in promissory notes which turned out to be Ponzi schemes,” Edmiston told Financial Advisor Magazine.
“After the brokerage firm filed for bankruptcy, we pursued the broker, obtained an arbitration award, had it confirmed as a judgment and spent years trying to collect. Meanwhile, our client, stressed with having to live on Social Security and little else, suffered a stroke, vascular dementia, and passed away in a retirement home. The last time I spoke with her, she thought I was her broker and asked what had happened to her money,” said Edmiston, who has represented investors as an attorney with Jonathan W. Evans & Associates in Studio City, Calif., for 15 years.
“This is just one example of how an investor was harmed. Every time I have an opportunity to speak with a legislator, regulator or other person with any authority to help solve the problem, I try my best to convey the pain, worry and fear that investors suffer when their trust is violated,” Edmiston said.
More than 30% of all customers arbitration awards go unpaid despite Finra’s efforts to address the problem. That accounted for nearly 25% of money awarded to investors in 2020, even as many brokerage firms’ profits grew to record levels, according to the latest PIABA report, which called on Congress, the Securities and Exchange Commission or both to step in and require Finra to create what they call a “National Investor Recovery Pool.”
“While PIABA supports Finra’s efforts to eliminate bad actors on the front-end, none of its efforts resolve the fundamental problem: when a bad actor doesn’t pay the award,” said Edmiston, who will continue the tradition of past PIABA presidents to fight for nonpayment solutions.
As envisioned by PIABA, the National Investor Recovery Pool would provide recovery funds for investors who pursue a claim all the way through a final award if they have exhausted reasonable efforts to collect the award from the respondent, he said.
Funding for the pool could come from Finra fine money, assessments on Finra member firms or fees levied on the investing public.
Finra did not respond to a request for comment by deadline. In 2018 the self-regulator said such a pool would present various conflicts of interest. Instead, the agency has opted to take steps to root out recidivist or rogue firms and brokers through a variety of regulations.
With the migration of financial professionals to the RIA space, the unpaid awards issue has become more complex, Edmiston said. The scope of the problem is “masked” due to many commercial arbitration forums’ lack of transparency and reportable information, he said.
“Investors should be given the right to choose their arbitration forum, and they should be given the right to choose court. After all, RIAs are fiduciaries and should be comfortable letting an investor decide which dispute resolution mechanism, arbitration or court, will be in their best interest,” Edmiston said.
Until that happens, for those RIAs who are mandating arbitration, “they should be subsidizing the costs of the forum selected. Additionally, investors would benefit from some transparency in the arbitration process, and some uniformity of rules. For example, investors are unable to look up prior arbitration awards in many forums other than FINRA,” Edmiston said.
o remedy this, PIABA wants states and the SEC to create a central depository that tracks disciplinary actions, arbitration and unpaid awards for RIAs, as BrokerCheck does for brokers and reps.
“In the coming year, PIABA will continue to work with all stakeholders and to call on the SEC to study the problem, exercise its congressional grant of authority and take steps to eliminate unpaid arbitration awards,” Edmiston said.
The group is also lobbying regulators and lawmakers to require advisors, reps and firms to disclose the existence of any potentially applicable insurance coverage, Edmiston said.