By George H. Friedman, SAA Publisher & Editor-in-Chief

We reported briefly in SAA 2022-20 (May 26) that the North American Securities Administrators Association (“NASAA”) on May 20 adopted its Unpaid Customer Arbitration Awards Model Rule. We decided the topic was worthy of expanded coverage.

As described in a May 20 Press Release: “The model rule would make it a dishonest or unethical practice for registrants to fail to pay any investment-related, customer-initiated arbitration award or judgment, fine, civil penalty, order of restitution, order of disgorgement, or similar monetary payment obligation imposed by any state securities regulator, the SEC, or FINRA. Registrants may also avoid licensing actions under the model rule by entering into and staying current with alternative payment arrangements related to obligations covered by the model rule. Ultimately, the model rule would provide an additional basis for enforcement actions related to unpaid awards and could help encourage registrants to satisfy their monetary obligations to customers, clients, and regulators.”

October 2021 Draft

As reported in SAA 2021-37 (Oct. 7), NASAA last Fall released draft model rules for public comment (see the October 5, 2021 Press Release, NASAA Seeks Public Comment on Proposed Model Rules to Combat Unpaid Arbitration Awards and Fines). These are the headlines as described in the Release (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.

The 11-page proposal had extensive background information as well as proposed model language for regulatory changes.

The Raison D'être in a Nutshell

The approved Model Rule is intended: “to provide member jurisdictions with an additional tool to address unpaid Financial Industry Regulatory Authority (‘FINRA’) arbitration awards by broker-dealers, agents, investment advisers, and investment adviser representatives. Ultimately, the Model Rules will serve as bases for enforcement actions related to unpaid awards and allow member jurisdictions to prevent the registration of firms and individuals, whether as broker-dealers, agents, investment advisers, or investment adviser representatives, if the firm or individual has outstanding FINRA arbitration awards or other regulatory obligations.”

Dovetails with PIABA Proposal

The NASAA Model Rule dovetails with efforts by PIABA to address unpaid awards. As also reported in # 37, PIABA in September 2021 issued its third report in over five years contending the problem of unpaid FINRA awards is getting worse, not better. The Report, FINRA Arbitration's Persistent Unpaid Award Problem, was announced in a 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 PIABA Report also contained concrete suggestions for statutory and regulatory changes, including creation of an unpaid awards fund.

(ed: For more details, we again recommend NASAA Approves Model Rule Targeting Unpaid Arbitration Awards, Wealth Management (May 23, 2022).)