The Financial Industry Regulatory Authority has sent a rule proposal to the Securities and Exchange Commission to allow investors to move arbitration cases to court if the brokerage firms become “inactive” or bankrupt.
FINRA’s plan is intended to address the growing problem of unpaid arbitration awards.
The SEC is requesting comments on FINRA’s plan until Dec. 13.
FINRA’s plan would amend the broker-dealer regulator’s Code of Arbitration Procedure for Customer Disputes to expand a customer’s options to withdraw an arbitration claim if a member or an associated person becomes inactive before a claim is filed or during a pending arbitration.
The proposed amendments would also allow customers to amend pleadings, postpone hearings, request default proceedings and receive a refund of filing fees in these situations.
Richard Berry, FINRA’s executive vice president and director of dispute resolution, said late last year 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.
The Securities Industry and Financial Markets Association is “generally supportive of the proposal to the extent it helps address the problem of unpaid arbitration awards,” Kevin Carroll, its managing director and associate general counsel, said in an email. “In order to better address unpaid awards, and better protect investors, however, the proposal should apply not only to customer cases but also to intra-industry cases.”
Sen. Elizabeth Warren, D-Mass., floated a bill last year to require FINRA to use its existing authority to compensate investors for unpaid arbitration awards.
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