June 08, 2012
Ms. Elizabeth M. Murphy, Secretary
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: Release No. 34-66910, File No. S7-08-07, Amendments to Financial Responsibility Rules for Broker-Dealers
Dear Ms. Murphy:
Thank you for the opportunity to comment on the proposal to adopt the rule changes reflected in File No. S7-08-07, Amendments to Financial Responsibility Rules for Broker-Dealers (the “Proposal”). I write on behalf of the Public Investors Arbitration Bar Association ("PIABA"). PIABA is a bar association comprised of attorneys who represent investors in securities arbitrations. Since its formation in 1990, PIABA has promoted the interests of the public investor in all securities and commodities arbitration forums. Our members and their clients have a strong interest in SEC rules relating to both investor protection and disclosure. PIABA is generally supportive of the Proposal because we believe that it will marginally increase the financial stability of broker-dealers and diminish the risk that public investors who prevail in arbitration proceedings conducted under the auspices of FINRA Dispute Resolution will be unable to collect damages awarded in their arbitrations.
Public investors are almost universally required to arbitrate disputes with broker-dealers before FINRA Dispute Resolution under pre-dispute arbitration agreements. Broker-dealers require customers to sign such agreements on a “take-it-or-leave-it” basis as a condition of opening customer accounts, and the courts have held that such pre-dispute arbitration agreements are binding and enforceable. See Shearson/American Express v. McMahon, 482 U.S. 220 (1987). These arbitration proceedings require a filing fee (waivable for customers who can demonstrate financial hardship) ranging from $50.00 to $1,800.00 (see FINRA Customer Code Section 12900, accessible at http://finra.complinet.com/en/display/display_main.html?rbid=2403&element_id=4188) and may cost customers additional sums of up to tens of thousands of dollars to prosecute to cover arbitration session fees, attorneys’ fees and expert witness fees.
These substantial sums must be paid by the public customer despite a significant risk that the customer will not win any damages in FINRA arbitration. Historically, customers have won some monetary damages in slightly less than half of customer cases that are resolved via an arbitration hearing (as opposed to being resolved by settlement, unilateral dismissal, dismissal by the arbitrators, or some other manner). See FINRA Arbitration Statistics, http://www.finra.org/ArbitrationAndMediation/FINRADisputeResolution/AdditionalResources/Statistics/.
In addition to the substantial risks of losing their cases and the substantial costs of FINRA arbitration, customers also face a significant risk that member firms will not pay an arbitration award in the event the customer prevails. Depending on the year and the study, between approximately 15% and 33% of FINRA arbitration awards have gone unpaid by member firms and associated persons. Further, there is no requirement that broker-dealers carry insurance to cover potential losses in FINRA arbitration. Many firms do not carry such insurance, and a large proportion of the unpaid FINRA arbitration awards are reportedly rendered against firms and associated persons who have simply become insolvent, gone out of business or left the securities business.
The insolvency or failure of thinly-capitalized brokerage firms due to customer arbitration claims has been a perennial problem but recently appears to have become more aggravated as a result of proliferation of claims against smaller firms for sales of unregistered securities such as non-traded real estate investment trusts (REITs) and tenancies in common (TICs).
In these circumstances, any measures (such as those in the Proposal) that marginally increase the financial stability of broker-dealers and will also tend to diminish the risk that public investors who prevail in arbitration proceedings conducted under the auspices of FINRA Dispute Resolution will be unable to collect any damages awarded. It stands to reason that more financially stable brokerage firms will be less likely to become insolvent or go out of business because of damages awards against them in arbitration. PIABA would also support a requirement that all broker-dealers be required to carry errors and omissions insurance that would cover customer claims.
Based on the foregoing, PIABA is generally supportive of the rule changes reflected in File No. S7-08-07. Thank you for your consideration.
Respectfully submitted,
Ryan K. Bakhtiari