AdvisorHub (October 6, 2021) - The North American Securities Administrators Association unveiled this week proposed model rules through which state regulators could revoke licenses of state-registered investment advisors and broker-dealers who stiff investors who won awards against them in arbitration.
If states adopt the rules, they “would make it an unethical business practice” for broker-dealers and investment advisors to fail to pay an arbitration award or fine and therefore subject them to state enforcement actions, including revocation of their licenses, according to the statement issued by NASAA, a nonprofit membership organization that includes all 50 state securities regulatory agencies in addition to the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, and Mexico.
NASAA seeks public comment on the proposal, which was made by its directors. The move comes as a plaintiff lawyers’ trade group, the Public Investors Advocate Bar Association, issued a report in September that almost 30% of investor awards were unpaid in 2020, up from 27% in 2019. Roughly 24% of all dollars awarded in 2020 were unpaid, up from almost 20% in 2019.
The NASAA proposal “is absolutely a step in the right direction, but it does not by itself solve the problem,” said Hugh Berkson, a principal in the Cleveland law firm McCarthy, Lebit, Crystal & Liffman, who co-authored the PIABA study.
Unpaid awards and unpaid dollar amounts peaked at 34% in 2017 and 2018, respectively, according to the PIABA study.
The Financial Industry Regulatory Authority already has an established adjudication process for barring broker-dealers and brokers from being active in the industry until customer awards are satisfied. The NASAA proposal, if embraced by state regulators, would impose those same restrictions on investment advisors who are not Finra-registered and may fall out of the Securities and Exchange Commission’s oversight because their clients’ assets are below the $100 million threshold.
A Finra spokeswoman said in a statement that the regulator “remains focused on reducing the amount of unpaid awards.”
“FINRA is committed to reducing the number of arbitration awards that go unpaid to customers, which typically result from respondents declaring bankruptcy or going out of business,” the statement also said.
Since Finra issued in 2018 a report on the unpaid fines, the industry’s self-regulator has “continued to take measures designed to reduce the risks to investors from brokers and firms who may be less likely to pay awards,” the spokesperson added.
The SEC in July approved Finra Rule 4111, which allows it to restrict firms based on their own and their registered representatives’ past disciplinary records and requires those firms to set aside funds that could cover unpaid awards. The rule takes effect in January 2022.
PIABA has said the funds would likely not be sufficient to cover all unpaid awards and has proposed that Finra could build a bigger pool from fines, assessments or fees paid by investors.
“FINRA appreciates that PIABA recognizes that customer recovery can be a challenge across the financial services industry and dispute resolution forums, and we remain committed to working with all stakeholders on this important issue,” the spokesperson concluded.