By George H. Friedman, SAA Publisher & Editor-in-Chief
PIABA’s third report in over five years says the problem of unpaid FINRA awards is getting worse, not better.
The Report, FINRA Arbitration's Persistent Unpaid Award Problem, was announced in a September 29 Press Release, PIABA - 30% of 2020 FINRA Arbitration Awards Went Unpaid, and via a 24-minute Zoom event. The headlines? “The percentage of unpaid customer awards in FINRA arbitration cases increased to nearly 30% and the percentage of unpaid award dollars rose to 24%, according to the Public Investors Advocate Bar Association’s (PIABA) new report on unpaid FINRA arbitration awards. PIABA’s first report on the topic was published in 2016, and the new update illustrates how the lack of improvement on this critical issue for American investors reflects FINRA’s refusal to solve the problem…. In short, the problem is not improving since PIABA’s initial 2016 Report.”
The Release lists several key findings, presented below verbatim:
- Due to the COVID-related shutdown of in-person hearings, fewer FINRA arbitration cases were heard in 2020, but the percentage of unpaid customer awards and unpaid award dollars both increased, despite record brokerage firm profits.
- 29.7% of customer awards were unpaid in 2020, up from 26.9% in 2019.
- 24.2% of all dollars awarded in 2020 were unpaid, up from 19.8% in 2019.
- Neither FINRA nor state and federal regulators have directly addressed the lack of meaningful recovery protection, and the problem of unpaid arbitration awards is growing.
- The 2020 figures are consistent with FINRA’s previously reported statistics, ranging from 12% of dollars unpaid in 2015 to a high of 34% in 2018, and 22% of awards unpaid in 2015 to a high of 34% in 2017.
The Report offers proposed investor protection remedies (again, repeated verbatim):
- Legislative Remedy: FINRA can solve the problem directly by instituting a national investor recovery pool, but it has steadfastly refused to do so unless ordered by the SEC or Congress. If FINRA remains resolute in its refusal to institute an investor recovery pool absent an instruction from Congress or the SEC, then PIABA asks Congress to intervene to address the problem and order FINRA to do its job and protect investors.
- SEC Dodd-Frank Remedy: If Congress cannot or will not act, and FINRA maintains course and refuses to remedy the problem on its own, the SEC has the authority to step in under Section 921 of the Dodd-Frank Act. The SEC could require that, as a condition of including a mandatory arbitration clause in its customer agreements, firms participate in an investor recovery pool.
- The National Investor Recovery Pool: The pool would provide recovery funds for investors who pursue a claim all the way through a final award and have exhausted reasonable efforts to collect the award from the respondent. There are a variety of potential sources for such funding: (1) FINRA fine monies assessed against member firms and associated persons violating FINRA rules; (2) assessments on FINRA members; and (3) fees levied on the investing public.
PIABA: The Money is There
PIABA asserts that there is more than enough money to support these proposed solutions: “FINRA reported that it issued $57 million in fines in 2020, more than enough money to address the unpaid awards that year. Alternatively, if FINRA were to assess fees, the cost in 2019 would have been $6,350.11 per firm or $107.26 per registered representative. Since neither the SEC nor FINRA have established an insurance requirement, the fees required to fund the pool would be far less than insurance premiums. And while PIABA does not suggest that assessing a direct charge to investors is the best choice, a 2019 pool would have required only 14 cents per investor for real, meaningful recovery protection.”
We reached out to FINRA for a reaction. A spokesperson said: “FINRA remains focused on reducing the amount of unpaid awards, as described in our 2018 Discussion Paper. FINRA is committed to reducing the number of arbitration awards that go unpaid to customers, which typically result from respondents declaring bankruptcy or going out of business. Since our 2018 report, we have continued to take measures designed to reduce the risks to investors from brokers and firms who may be less likely to pay awards. FINRA appreciates that PIABA recognizes that customer recovery can be a challenge across the financial services industry and dispute resolution forums, and we remain committed to working with all stakeholders on this important issue.”
NASAA Weighs In
Just as we were putting this Alert to bed, NASAA issued an October 5 Press Release, NASAA Seeks Public Comment on Proposed Model Rules to Combat Unpaid Arbitration Awards and Fines. We will prepare an analysis in the next Alert, but these are the headlines (ed: repeated verbatim): “Specifically, the Model Rules would add the following provisions to the existing rules on dishonest or unethical business practices by broker-dealers, agents, investment advisers and investment-adviser representatives:
- Failing to satisfy an arbitration award resulting from a client or customer-initiated arbitration,
- Attempting to avoid payment of any client or customer-initiated arbitration; or,
- Failing to satisfy the terms of any order resulting from a regulatory action taken against the registrant.
Comments are due November 4.
(ed: We’re reasonably certain this is not the last we’ve heard about this issue!)