Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Regulation and Compliance > Federal Regulation > FINRA

Quarter of FINRA Arb Awards Went Unpaid in 2016

Your article was successfully shared with the contacts you provided.

A quarter of all Financial Industry Regulatory Authority customer arbitration cases that awarded damages went unpaid in 2016, according to a just released discussion paper by FINRA.

Andrew Stoltmann, president of the Public Investors Arbitration Bar Association, called the percentage “massive,” but applauded FINRA for “attempting to get on top” of the issue by releasing the discussion paper.

The paper — “FINRA Perspectives on Customer Recovery” — released Wednesday, details perspectives on customer recovery of judgments and awards in the financial services industry, with a particular focus on the arbitration forum operated by FINRA.

By releasing the paper, the broker-dealer self-regulator said it “hopes to encourage a continued dialogue about addressing the challenges of customer recovery across the industry.”

According to FINRA’s paper, in 2016, of the total 2,457 arbitration cases, 1,747 settled, 389 closed by award, 212 were withdrawn and 109 closed “by other means.”

FINRA also released Wednesday a Regulatory Notice seeking comment on proposed amendments to its rules designed to create further incentives for the timely payment of awards by preventing an individual from switching firms, or a firm from using asset transfers or similar transactions, to avoid payment of arbitration awards.

FINRA states in the paper that it plans to organize discussions with other regulators and policymakers “to further address the issue of customer recovery, identify additional data or analysis that may help inform effective decision-making in this area, and consider potential courses of action.”

Steps by Congress or the SEC should also be considered to remedy the unpaid arb award problem, FINRA states. They include:

  • SEC could require firms to raise or maintain additional capital;

  • Congress could expand Securities Investor Protection Corp. (SIPC) coverage to include unpaid customer arbitration awards;

  • Congress or SEC or FINRA rulemaking could require firms to carry insurance to cover unpaid arbitration awards;

  • Legislation or SEC or FINRA rule could create a second brokerage industry fund, separate from SIPC;

  • Amendments could be made to the SEC’s Form BD to require disclosure regarding unpaid awards by firms;

  • Congress could amend the Securities Exchange Act of 1934 statutory disqualification definition to include more instances in which a firm or individual fails to pay an arbitration award; or

  • Congress could amend the Bankruptcy Code so that arbitration awards cannot be discharged in bankruptcy.

FINRA said that it’s also seeking to provide more transparency around the dispute resolution forum and better inform discussions regarding customer recovery by making additional data on unpaid customer arbitration awards arising in its forum for the past five years available on its website.

David Bellaire, general counsel for the Financial Services Institute, stated that FSI ”supports efforts to ensure that investors receive the recovery to which they are entitled whether they receive an award through FINRA arbitration, a court decision or through some other forum.”

However, he continued, “the solution to this problem should not require those who honor their obligations to bear the burden of the bad acts of those that left the industry or are otherwise avoiding their responsibilities.”

He added that FSI looks forward “to participating in this important dialogue with regulators, policymakers and other stakeholders and appreciate FINRA’s efforts to initiate it.”


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.