While the dollar amounts of arbitration awards that are going unpaid has been decreasing, improving this process is “of vital importance to investors and broker-dealers who are playing by the rules,” according to outgoing Securities and Exchange Commission member Kara Stein.
In comments before the SEC Investor Advisory Committee meeting Thursday, Stein, a Democrat, stated that even after investors win their claim against a broker-dealer in the Financial Industry Regulatory Authority arbitration process, “they may not get their damages award.”
In 2016, 27% of cases where damages were awarded remain unpaid, Stein said. “That’s getting close to a third. In dollar terms, investors were unable to recover $14 million that had been awarded to them in the arbitration process.”
Fortunately, she continued, the dollar amounts of awards that are going unpaid has been decreasing. “In 2013, there was $75 million in unpaid awards. In 2014, there was $23 million and in 2015 there was $24 million in unpaid awards,” Stein reported. “This is good news, but we still have a way to go.”
Richard Berry, FINRA’s executive vice president and director of dispute resolution, told the committee in his comments that unpaid awards represent “about 2% of the nearly 13,000 customer cases closed between 2012 and 2016.”
The “vast majority” of customer cases close by settlement, not award, Berry added.
“This means that most arbitration cases will be resolved without the need for an award. However, when we focus more closely on the smaller subset of cases in which the arbitrators award damages to the customer, we note that about a third of these awards go unpaid,” he explained.
He argued that the challenge of unpaid awards and judgments “is not unique” to the broker-dealer industry, and also occur “in the investment advisor space” as well as the broader financial services sector.
“FINRA has provided greater transparency for investors about a broker’s arbitration history,” he said. ”And, unlike any other arbitration forums of which we are aware, FINRA provides data on unpaid customer awards for the past five years on its website, including a list of those responsible for the unpaid awards.”
FINRA has taken numerous steps to address unpaid awards.