Financial Advisor (September 29, 2021) - Nearly one out of four dollars awarded to investors in 2020 went unpaid, even as many brokerage firms’ profits grew to record levels, according to a new report published today by the Public Investors Arbitration Bar Association (PIABA).
In issuing the report, the PIABA said Congress, the Securities and Exchange Commission or both must step in and require the Financial Industry Regulatory Authority (Finra) to create what they call a “National Investor Recovery Pool,” PIABA executives said during a press conference on Wednesday. This is the second time the trade group has called for this remedy since 2016.
FINRA reported 64 awards in customer claimant cases in 2020, with total awards of $20,895,826.21. PIABA’s analysis showed that of the 64 awards in customer cases made in 2020, 19 customers and a total of $5,050,328.98 in awards went unpaid.
Due to Covid, “the dollar amount of unpaid awards seems modest compared to other years’ experience, but it reflects 24% of all dollars awarded in 2020 were unpaid,” the report states. Using the same calculation PIABA estimated $18 million in unpaid awards and 18.4% of all dollars awarded were unpaid in a 2019, less than the $19 million Finra found.
“How do we fix the issue? While Finra can solve the problem directly by instituting a National Investor Recovery Pool, it has refused to do so unless ordered by the SEC or Congress. So long as Finra continues its refusal…Piaba asks Congress to intervene and address the problem and order Finra to do its job to protect investors,” Hugh Berkson, Piaba’s former president and the report’s co-author told reporters.
“We all know how well the legislative process is working these days, so we offer remedy number two, an SEC Dodd-Frank remedy. If Finra or the Congress will not act, as a practical matter the SEC can solve this problem. The SEC has the authority to step in under Section 921 of the Dodd-Frank Act. They could require as a condition of firms requiring mandatory arbitration clause in their customer agreements that firms participate in an investor recovery pool,” Berkson said.
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 added.
Funding for the pool could be provided from Finra fine money, assessments on Finra member firms or fees levied on the investing public. “We have a very clear problem the industry created and a very clear way it could be fixed and financed by the industry,” Berkson said.
A recovery pool “presents the most viable option because it can be created within the existing regulatory structure and will present both the lowest possible impact to the brokerage industry and the best financial impact for aggrieved investors,” he said.
Finra did not respond to a request for comment by deadline. But 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.
For instance, in an effort to force higher risk firms or those that employ higher-risk reps, a new Finra regulation that came out Tuesday would allow the agency to require firms to deposit cash or qualified securities in a segregated, restricted account, which can be used to cover arbitration awards. The agency also to implement heightened supervisory procedures on firms that register reps deemed higher risk.
Berkson called the regulations “a step in the right direction, but not sufficient to raise capital requirements to ensure that these firms have enough capital reserves to pay arbitration awards.”
While Finra is the dominate arbitration forum for the securities industry, other forums such as JAMS, AAA, or other private arbitration forums do not report arbitrations or unpaid awards.
Also troubling is the trend of FINRA-licensed brokers leaving the industry (often in a cloud of scorn following regulatory or customer complaints) and joining the ranks of SEC-registered investment advisors The SEC does not administer a dispute resolution forum for IAs like FINRA does for brokers. PIABA, despite its best efforts, found no centralized database demonstrating the results of claims made against investment advisors.
Piaba also wants states and the SEC to create a central depository that tracks arbitration and unpaid awards.
Current Piaba President David Meyers said he recently represented a client—74-year-old widow Barbara Gelderloos of Columbus, Ohio--who obtained an award for the full $612,000 amount she sought from Gahana, Ohio-based Fishers Wealth Management, a state-registered investment advisor, that “sold them hundreds of thousands of dollars of totally speculative nonpublic, illiquid private securities as her now-deceased husband lay dying of brain cancer,” Meyers told reporters.
“It’s a small firm and she faces a real possibility of not collecting on her award. She never would have imagined that she will not collect the money that she is owed and that the financial planning firm that was supposed to have the expert in financial matters would not have the financial ability to satisfy a judgement. Or that there was no requirement the firm have liability insurance. Or that there is no regulatory protection to ensure she’d collect a judgement from a fully-licensed registered investment advisor firm,” Meyers said.
A call to Fishers Wealth Management rolled over to an executive office space answering service and was not returned.
“This problem has been going on too long and there are many people who are faced with the unpaid arbitration problem. It’s time for a fix and the time is now,” he added.