A recent report by the Financial Industry Regulatory Authority shows that 22 to 30 percent of monetary awards to investors went unpaid from 2012 to 2016. But the trend continued into 2017, according to a new report by the Public Investors Arbitration Bar Association, which found that nearly 36 percent of investors who won their cases collected nothing. Twenty-eight cents of every dollar awarded went unpaid last year.
The issue is now catching the attention of Congress, with Senator Elizabeth Warren (D, Mass.) introducing a bill Tuesday requiring FINRA to establish a pool funded by fines levied against member firms to pay unpaid arbitration awards. The bill would also direct FINRA to track whether arbitration awards are paid.
“When FINRA refuses to act, it becomes necessary for legislators to act, and that’s what Senator Warren is doing,” said PIABA President Andrew Stoltmann, an attorney with the Stoltmann Law Offices. “The bad guys help the good guys recover, and that’s how it should be.”
PIABA has also advocated for an investor recovery pool to address the issue, it believes fine money is the most appealing source of funds. According to FINRA data, there was $14 million in unpaid arbitration awards in 2016; the self-regulatory organization collected nearly $174 million in fines the same year.
“There is such an overage of fine money,” Stoltmann said.
As an alternative, PIABA suggests that FINRA fund the pool out of its net profits, which were $57.7 million in 2016.
The regulator could also fund the pool by assessing a modest fee on its members, PIABA argues. According to the group’s report, a fee of $32.78 per broker would cover the unpaid arbitration awards for 2017, ignoring administrative costs.
“Self-regulation works best when the industry bears the costs of industry misconduct,” the PIABA report says. “When the industry internalizes the costs of misbehavior, it is incentivized to police its own ranks efficiently.”
“The good should not suffer because of the bad,” said Robin Traxler, vice president of regulatory affairs and associate general counsel at the Financial Services Institute, in a statement. “So we are encouraged by the bill’s language that would require the fund come from penalties paid by brokers. This is an important issue and we look forward to working with all stakeholders to find an equitable solution that makes harmed investors whole while not penalizing honest advisors and firms.”
Along with releasing its data on arbitration awards in early February, FINRA also outlined steps it has taken to address the issue, including barring firms and brokers that don’t pay awards. In 2016, FINRA moved to suspend 20 firms or reps involved with 15 awards; all but five either settled or paid the award. Other proposals include letting investors file complaints in civil court against non-paying firms and insisting on more information about firms’ unpaid awards be listed on their Form U4s.
“Greater disclosure, while a good thing in the abstract, will not incentivize brokers and firms who are no longer registered to pay outstanding arbitration awards,” the PIABA report says.
FINRA says additional steps need to involve other regulators. That includes requirements from the Securities and Exchange Commission that firms raise or maintain additional capital. They also suggest expanding Securities Investor Protection Corporation coverage to include unpaid customer arbitration awards. Another idea from FINRA is to have Congress or the SEC require firms to carry separate arbitration claim insurance or the SEC amending its Form BD to include a disclosure of unpaid awards by firms. They also suggest amending bankruptcy laws so that arbitration awards cannot be discharged.
“FINRA has taken very incremental, minor steps to address this issue. And it’s certainly taking credit for that, but nothing that FINRA is doing is putting money in investors’ pockets,” Stoltmann said.
PIABA's 2017 calculation for unpaid awards was determined by looking at total awards (about $73 million) and the amount of awards that were issued against brokers or firms that are no longer registered (about $21 million), a characteristic the group says makes it probable that the awards went unpaid.