Financial Advisor (March 8, 2018) — The Public Investors Arbitration Bar Association (PIABA) used a press conference Wednesday to call on Finra to create an “investor recovery pool” that would use Finra fines to pay the growing number of investors who are unable to collect when they win in Finra arbitration.

The number of unpaid Finra arbitration awards hit the $250 million mark in 2017, according to a new PIABA report released at the press conference, which also found that unpaid arbitrations had risen to 38 percent in 2017, up from 28 percent in 2016. The PIABA report: Unpaid Arbitration Awards: The Case for An Investor Recovery Pool, is available here: https://piaba.org/piaba-newsroom/unpaid-awards.

PIABA’s “investor recovery pool” mirrors the investor recovery mechanism in a bill introduced by Sen. Elizabeth Warren (D-Mass.) on Tuesday, which would require the Financial Industry Regulatory Authority to establish a pool of money to cover arbitration shortfalls. Warren said Finra could use the fines it collects from broker-dealer firms that violate its rules or find another funding mechanism.

The Financial Services Institute said it is reviewing Warren’s bill, but is encouraged that fines and not higher industry fees would be used to fund her Finra investor recovery pool.  FSI’s support could mark a tipping point for investor recovery.

“The good should not suffer because of the bad. So we are encouraged by the bill’s language that would require the fund come from penalties paid by brokers,” said FSI’s Vice President of Regulatory Affairs Robin Traxler. “This is an important issue and we look forward to working with all stakeholders to find an equitable solution that makes harmed investors whole while not penalizing honest advisors and firms.”

While Finra’s collection of industry fines it levies on firms that broke its rules fell to $73 million from $176 million in 2016, a 58 percent drop, the self-regulator has enough fine money to pay off every investor with unpaid arbitration awards many times over, PIABA attorneys said.

Also worth noting: Legislation is not needed to create a Finra-funded investor recovery pool. Finra and the SEC could create such a pool using rulemaking, PIABA President Andrew Stoltmann said at the group’s press conference.

Finra Spokesperson Michelle Ong told Financial Advisor in a statement: “Finra has taken many steps in recent years to use the tools within its power to help customers recover the awards they are owed.  Through the discussion paper that we released last month, we have outlined many options and issues that should inform the development of further measures to enhance customer recovery. This issue is unfortunately not unique to Finra’s forum or the broker-dealer industry,” Ong said.

Finra discussed the possibility of an investor recovery pool in its February report “Finra Perspectives on Customer Recovery.” (Finra has already tightened rules for hiring brokers with pending arbitration.)

“Another approach would be to create a second brokerage industry fund, separate from SIPC, to cover unpaid customer arbitration awards,” the report says. “This second fund could be established by Congress through legislation, by SEC or Finra rulemaking (where any Finra rules would require SEC approval), or a combination of the foregoing. It could be funded by assessments of brokerage industry participants directly, indirectly through a Finra funding mechanism, or in some other manner … Finra believes that Congress or the SEC should be involved in any decision to create a second brokerage industry fund for unpaid arbitration awards, especially to the extent it would cover claims that Congress has determined should not be covered by SIPC.”

“I do give Finra some credit for their report,” PIABA’s Stoltmann told Financial Advisor. “It is a good first step and something PIABA has been calling for since 2016. I think Finra realizes that this is an important issue.”

But Finra’s failure to come up with an action plan since acknowledging the problem as the number of unpaid arbitration awards and investors climbs “undercuts Finra’s legitimacy as a self-regulator,” Chicago-based arbitration attorney and PIABA Board Member Adam Gana said at the press conference. “It is long overdue for Congress and Finra to address this,” he added.

Gana’s client, two-time Super Bowl great and former Green Bay Packers offensive tackle Bruce Wilkerson, told reporters he continues to work as a machinist today after losing most of his retirement to a Ponzi scheme.

Despite winning a Finra arbitration award for $2 million in 2015, Wilkerson hasn’t collected a dime of his money back and his award remains unpaid today. “I lost most of my net worth. My outlook for early retirement is grim. I will most likely be working until my late 60s and perhaps never fully retire. Americans deserve to have their hard-earned savings returned to them,” Wilkerson said.

PIABA is hoping to change that. The group’s 2018 Capital Hill Day is Thursday. It’s a day when arbitration attorneys will meet with their respective federal lawmakers here in Washington, DC, in the hope of persuading them that a Finra-funded investor recovery pool is a win-win proposition for investors, the industry and regulation.  Both PIABA and Warren are hoping to persuade more moderate GOP lawmakers on the Senate Banking Committee to co-sponsor Warren’s bill.