Financial Advisor IQ (September 30, 2021) – The Public Investors Advocate Bar Association is again calling for a national investor recovery pool to cover unpaid Financial Industry Regulatory Authority arbitration awards.

The group says the Securities and Exchange Commission may be the only hope for getting this done.

Piaba says 24% of the money awarded by arbitrators in 2020 remains unpaid. That’s equal to $5 million from 19 awards unpaid out of a total of $21 million from 64 awards, Piaba data shows.

In explaining the data, Piaba says in the cases where respondents responsible for paying the awards lost their licenses before the awards were issued, failed to participate in the hearings, lost their licenses after the awards were issued because of a failure to pay awards, or filed for bankruptcy protection after the awards were issued, Piaba “assumed the awards were unpaid.”

Piaba has proposed the creation of a national pool since it issued its first report on unpaid arbitration awards in 2016.

The latest report, released Wednesday, calls for a pool of $24 million, based on average unpaid award data from 2017 to 2019, to be funded by some combination of Finra fines on members and fees assessed to members and/or investors.

Finra could create such a pool, Piaba noted, but the self-regulator will only do so if ordered by Congress or the SEC.

There’s little optimism for the former at Piaba, according to president David Meyer, who co-wrote the latest report.

The chances of Congress acting on a national investor recovery pool are “extremely poor based on what’s going on now in D.C.,” Meyer said during a press briefing. “The reality is the practical way to resolve this problem is through the SEC at this point.”

How the SEC could do that, the report notes, is through Section 921 of the Dodd-Frank Act, which allows the regulator to “prohibit, or impose conditions or limitations on the use of agreements that require customers or clients of any broker, dealer, or municipal securities dealer to arbitrate any future dispute.”

Essentially, the SEC could require firms to participate in a recovery pool to include mandatory arbitration clauses in customer agreements, according to the report.

Finra has taken some steps to curb unpaid arbitration awards. On Tuesday, Finra issued a regulatory notice adopting Rule 4111, effective January 2022, which would require firms with a history of misconduct, including those who employ a large number of individuals with bad marks on their records, to deposit cash or securities into a segregated account.

However, that doesn’t go far enough, Meyer says.

“These incremental changes will help on the ends, but it’s not going to have a significant impact on the huge unpaid arbitration award,” Meyer said. “We’ve got to fix the problem, as opposed to just addressing the symptoms.”

When asked for comment about Piaba’s briefing and report, a Finra spokesperson told FA-IQ that the self-regulator “remains focused on reducing the amount of unpaid awards,” noting the efforts were discussed in a 2018 report.

“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 spokesperson said.

“Since our 2018 report, we have 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 Finra spokesperson notes that the self-regulator appreciates that Piaba recognizes that customer recovery can be a challenge across the financial services industry and dispute resolution forums.

“We remain committed to working with all stakeholders on this important issue,” the spokesperson said.