Quarter of FINRA Arb Awards Went Unpaid in 2016

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.”