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FINRA: Clients May Win Arbitration, But Many Firms Fail to Pay

Up to 30 percent of monetary awards to investors in arbitration claims go unpaid, the self-regulator said. “It’s crystal clear this is and remains a huge problem for FINRA and therefore for investors,” says PIABA President Andrew Stoltmann.

This week the Financial Industry Regulatory Authority released data on the level of arbitration awards for investors who have successfully won claims against professional investment firms. The watchdog”s report shows that 22 to 30 percent of monetary awards to investors went unpaid from 2012 to 2016. In 2016, the most recent year FINRA has data for, there were a total of 158 arbitration cases awarded damages, and almost three out of every 10 judgements went unpaid.

“This is the first time we’ve seen documented evidence ... as to the scope of the problem, and it’s crystal clear this is and remains a huge problem for FINRA and therefore for investors,” said Andrew Stoltmann, president of the Public Investors Arbitration Bar Association, and an attorney with the Stoltmann Law Offices.

Stoltmann has made unpaid FINRA arbitration awards a priority during his term as president. His group will issue a report with their own findings on the matter in March. A February 2016 PIABA report found that $62.1 million of arbitration awards went unpaid in 2013 alone; FINRA’s own data shows that understated the matter: It was actually $75 million.

In its report, the self-regulatory organization 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 a firms’ unpaid awards be listed on their Form U4s.

“They’re seriously looking to stop the process of a broker going to another firm with unpaid awards or allowing a brokerage firm to employ the brokers from a firm that’s gone out of business because of unpaid awards,” Stoltmann said.

But 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 havet 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 is truly sick of being the piñata on this issue,” Stoltmann said. “So they are trying to spread the blame and the burden on other entities.”

But Stoltmann believes the most promising alternative, which FINRA also outlined in the paper, would be to create an unpaid arbitration pot to be funded by the brokerage industry.

“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.”

In a statement, the Financial Services Institute, which advocates on behalf of independent brokerages, said it supported FINRA’s efforts. 

“However, the solution to this problem should not require those who honor their obligations to bear the burden of the bad acts of those that left the industry or are otherwise avoiding their responsibilities,” said David Bellaire, executive vice president and general counsel. “We look forward to participating in this important dialogue with regulators, policy makers and other stakeholders and appreciate FINRA’s efforts to initiate it.”

In its report FINRA points out that instances of unpaid awards don’t always mean a client went home empty-handed.

“In many cases,” FINRA said in its report, an unpaid award was part of a settlement with more than one firm, others of which may indeed have paid the claim. 

But of the 44 awards that went unpaid in 2016, 13 involved a settlement. “Those cases are very rare,” Stoltmann said.

FINRA’s data suggests that the issue is improving if one looks only at the dollar amount. In 2012, 47 percent, or $51 million, of the total amount awarded that year went unpaid. That compares to just 12 percent, or $14 million, of the total amount going unpaid in 2016.

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