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FINRA’s New Arb Award Rules Merely ‘Nibbling’ at Bigger Problem: PIABA

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The Financial Industry Regulatory Authority’s newly amended Membership Application Program (MAP) rules, which are designed to make it harder for brokers to switch firms without paying arbitration awards, are really “just a nibbling around the edges,” and fail to adequately protect investors from bad brokers, according to Samuel Edwards, a partner at Shepard Smith Edward & Kantas in Houston, who also serves as president of the Public Investors Advocate Bar Association.

The newly amended MAP rules, as FINRA explains in Regulatory Notice 20-15, “create further incentives for timely payment of arbitration awards by preventing an individual from switching firms, or a firm from using asset transfers or similar transactions, to avoid payment of arbitration awards.”

Edwards told ThinkAdvisor in a Tuesday phone interview that FINRA’s amended MAP rules “are a step in the right direction, but a relatively small step. What it [the amended rule] doesn’t really address: FINRA needs to flat-out kick these people out or not let them get back in.”

PIABA is a group of lawyers who represent investors in disputes with the securities industry.

What the rule “is trying to fix is to address bad brokers who are flipping in between firms and not paying awards,” Edwards said. However, “the bigger issue that’s always been somewhat something that could be stopped,” he continued, are firms that “get actions against them and can’t pay them” and then shut down.

Historically, Edwards continued, these firms have been able to “reconstitute themselves as a new firm, we’ve often seen it — same office, same address, same everything — just a new name” to avoid liability.

The amendments, which become effective on Sept. 14, will address the following situations: A FINRA member firm hires individuals with pending arbitration claims, where there are concerns about the payment of those claims should they go to award or result in a settlement, and the supervision of those individuals; and a member firm with substantial arbitration claims seeks to avoid payment of the claims by shifting its assets, which are typically customer accounts, or its managers and owners, to another firm and closing down.

Jon Henschen, president of Henschen & Associates, a firm that helps advisors find broker-dealer relationships, told ThinkAdvisor in an email message that “as far as an individual advisor moving to a new broker-dealer while having a pending case, it is standard procedure for broker-dealers to not bring on advisors that have anything pending,” though rogue firms “may allow such practices.”

Clients not getting paid arbitration awards occurs most often “when firms close,” Henschen said. “We’ve seen broker-dealers negotiate with clients over settlements over fraudulent alternative investments as an example where they go to the client and explain that they can offer 40c[ents] on the dollar or risk the firm closing down and getting nothing. The client will typically choose the 40c[ents] on the dollar option.”

Henschen adds that FINRA’s new rule amendments do make it harder for brokers to switch BDs “if they owe money from current or pending arbitration cases. It was already difficult to make a move except for some of the more marginal broker-dealers that would except them.”

FINRA’s frustration, he says, has been “clients winning arbitration awards but not being able to collect those awards due to representatives skipping to other broker-dealers or via broker-dealers closing down.”

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