Financial Advisor (January 6, 2020) - Investors may soon be able to bypass arbitration and proceed to court if their broker or brokerage firm leaves the business while an arbitration claim is pending—the result of a Financial Industry Regulatory Administration proposal.
The change wouldn’t solve the longstanding problem of unpaid arbitration claims, Public Investors Advocate Bar Association (PIABA) President Samuel Edwards said in a letter to FINRA.One in three arbitration awards and roughly 25% of the money awarded—totaling approximately $62.1 million—went unpaid in 2013 alone, according to PIABA's 2016 study of unpaid arbitration awards.
The newly proposed changes are a modest improvement that allow aggrieved investors to elect to file claims against inactive members and associated persons in court, “bypassing FINRA arbitration and potentially streamlining the process of obtaining a judgment,” said Edwards.
Edwards said PIABA supports the proposal “because in certain circumstances it may be more expeditious and cost effective for a customer to pursue default proceedings in state or federal courts when the named respondents are no longer FINRA members, rather than attempting to obtain an arbitration award first and then convert the award into a judgment.”
Currently, FINRA’s arbitration rules do not address instances where firms and reps leave the business while arbitration claims are pending.
As a result of the changes, FINRA would be required to provide notice to a claimant when a member or associated person becomes inactive. Claimants would then be given 60 days to review their litigation strategy in light of the changed circumstances and can withdraw the claims without prejudice within 60 days of receiving notice.
The proposed rule would also permit a customer claimant to add respondents. “Upon learning of a member’s becoming inactive, claimants’ counsel may wish to consider asserting claims against associated persons, supervisory personnel, owners or control persons,” Edwards said.
“Given the low net capital and lack of insurance that often characterize smaller broker-dealers, this amendment is important because it permits a customer claimant to pursue claims against potentially collectible respondents when an inactive member may not have any assets from which to collect a judgment,” he added.
The proposed amendments would also allow a claimant to unilaterally postpone a hearing, with no postponement fee charged by FINRA, if the claimant receives such notice within 60 days of the scheduled FINRA hearing and the customer elects to postpone. Arbitrators would be paid their late postponement honoraria by FINRA (not the claimant), and the customer would be refunded his or her filing fee, if such a postponement is within 10 days of a scheduled hearing.
“PIABA supports this proposal to have FINRA compensate the arbitrators’ honoraria and refund the claimant’s filing fee under these circumstances,” Edwards said.
The proposal also clarifies that a customer may request default proceedings against an associated person regardless of how long the person has been terminated.
Edwards said the change “represents a modest improvement because it will permit some additional customer claimants to pursue default proceedings against inactive associated persons in circumstances in which this remedy is currently unavailable.”
Still, he asserted, the changes are “insufficient to remedy the longstanding problem of unpaid arbitration awards, which disproportionately involve customer claims against inactive Finra members and associated persons,” Edwards added.
While reps and brokers may “reap enormous commissions from selling unregistered products such as private placements under Regulation D, and distribute the profits to shareholders, stand ready to close their doors and thumb their noses at aggrieved customer claimants when a financial product that they have been selling turns out to be part of a fraudulent scheme,” he said.
PIABA continues to urge FINRA to establish a national investor recovery pool.
“While PIABA supports every measure taken to address the serious unpaid award problem, we reiterate our concern that FINRA’s current proposal will not address in a meaningful way the millions of dollars of in unpaid awards that make a mockery of FINRA arbitration as a means of recovering investor losses. It is critical that FINRA stop delaying and institute a real cure to the problem: a national investor recovery pool,” Edwards concluded.