A group of investor-advocacy lawyers is blasting a decision by Finra, the brokerage industry’s self-regulatory organization, to issue $50 million in rebates to member firms rather than to use that money to repay investors who lost money at the hands of unscrupulous firms.
The money stems from an operating surplus Finra posted last year. In May, the regulator announced plans to issue rebates rather than hold the money as a buffer against potential future deficits.
But Piaba, the Public Investors Advocate Bar Association, argues that instead of issuing rebates to brokerage firms, Finra should put the money toward compensating investors who have won arbitration disputes against a broker but haven’t received their monetary award.
Piaba President Adam Gana calls unpaid arbitration awards “a multimillion-dollar crisis” that fails investors who rely on Finra’s arbitration system as a path to recoup losses caused by their brokerage firms.
“It’s totally unacceptable that when investors win cases, they don’t see a penny of the money nearly one-third of the time,” he says. “It’s clear that this is not the way to promote Finra’s mission of protecting investors and promoting market integrity.”
The regulator counters that the fee rebates are being distributed only to active firms in good standing, and that the refund process was approved by the Securities and Exchange Commission, which oversees Finra.
“The 2024 fees were filed with the SEC, and they were not designed to be used in the manner that Piaba describes,” Finra says.
Finra also pointed to “several measures” it has taken to address unpaid arbitration awards, including a rule requiring certain firms that have been designated as “restricted” to set aside funds that could be used to pay investor arbitration awards, as well as a change to its membership application process that aimed to incentivize individuals and firms to honor their arbitration responsibilities.
Those changes haven’t placated Piaba, which has been a frequent critic of Finra, often arguing that it seems to prioritize the brokerage firms it regulates over individual investors.
In 2021, Piaba published a report finding that nearly 30% of arbitration awards, and 24% of dollars awarded through arbitration disputes, went unpaid in 2020, both increases from the previous year.
Piaba is calling on Finra, the SEC, or Congress to tackle the issue of unpaid arbitration awards, but cautions that recent moves such as making the qualifications for arbiters more selective suggest that the regulator seems to be disfavoring investors.
“We are seeing multiple red flags indicating that Finra is setting a dangerous new course that will ultimately hurt investors and markets,” Gana says. “Between flouting the unpaid arbitration award problem, to the fly-by-night rule changes shrinking the arbitrator pool, to pushing supervisory shortcuts like remote inspections, Piaba is very concerned.”