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‘Terribly Harmed’ Investors Who Were Stiffed on Arbitration Awards

June 6, 2017

by Howard Haykin


The FINRA Board of Governors met in May and authorized FINRA to take some action to help aggrieved investors who are saddled with ‘unpaid arbitration awards’.


First, the Board authorized FINRA to solicit comment on proposed amendments to FINRA’s Code of Arbitration Procedure for Customer Disputes, that would expand a customer’s option to withdraw an arbitration claim and file in court, even if a mandatory arbitration agreement applies to the claim – in certain situations: (i) where a member firm becomes inactive during a pending arbitration, or (ii) where an associated person becomes inactive either before a claim is filed, or (iii) during a pending arbitration. Related changes would also be made to allow customers to amend pleadings, postpone hearings, request default proceedings and receive a refund of filing fees under such situations.


Second, the Board approved proposed amendments that would expand Form U4 to elicit information from registered reps that do not pay arbitration awards, settlements and judgments in full in accordance with their terms.


WAIT A SEC' - WHAT ABOUT A NATIONAL RECOVERY POOL?    Many investor advocates expected FINRA to talk about establishing a national recovery pool, especially after the regulator raised expectations last year that it might do so. Such a pool would be used to fund aggrieved investors - like the unsuspecting investor who was cheated out of a proverbial fortune by a dishonest broker who churned the that customer’s accounts. That customer won an arbitration award but was unable to collect any money because the broker left the securities industry and filed for personal bankruptcy. Is that how this story ends?


Not according to a May 2017 article in Financial-planning, 'FINRA to 'terribly harmed' investors: No recovery pool', or to the 2016 WSJournal article, 'Arbitration Awards Against Stockbrokers Go Unpaid', which cited FINRA statistics that more than $34 million of arbitration awards made to investors in 2014 remained unpaid – approximately 15% of the total awards granted that year. Citing other sources, the WSJournal reported that almost $213 million of awards granted to investors in the 5 years through 2014, or 13% of overall awards, remained unpaid.


The subject was similarly addressed in a 2016 report from the Public Investors Arbitration Bar Association, 'Unpaid Arbitration Awards', and in the 2016 ThinkAdvisor article, 'The Mysterious Case of the Unpaid Arbitration Awards'


FINANCIALISH TAKE AWAYS.    Okay, so there I am, all set to throw my support behind the call for a national recovery pool (to compensate ‘terribly-harmed’ investors), as recommended by PIABA. Such a fund, by the way, would be funded annually by a $100 assessment from each of the 650,000 or so registered brokers.


And then I came across CNBC’s article from March 2016 - 'Wronged Investors Win Cases Over Brokers but Never Collect' - which changed everything, including my thoughts about a national recovery pool. Here are some of my countervailing thoughts.


  • "The reality is that problems with collection of judgments exist across all courts, arbitration forums and government agency [e.g., SEC, CFTC] settlements."

►  That statement, from FINRA, is perhaps the most compelling argument against a national recovery pool. When one considers the universe of arbitrations, lawsuits and other legal proceedings pertaining to the financial services industry, we encounter hundreds of millions – if not, billions – of dollars in annual awards that go unpaid. Why try an ‘right a single wrong’ – unpaid FINRA arbitration awards – when a larger universe needs to be addressed?


  • PIABA appears to be the most vocal advocates for a national pool – and for obvious reasons. PIABA members are attorneys who represent arbitration clients, and they all get stiffed when brokers don’t pay arbitration awards. So, when pleading on behalf of harmed investors, these attorneys are also pleading for themselves. Let’s, therefore, seek out objective commentary from others who are not so conflicted in their interests.


  • Coming up with a proper solution is hard than it looks. Take, for example, 2 viable alternatives that never made it off FINRA’s drawing board: (i) requiring firms to have insurance that would cover losses in arbitration disputes (it would have been too expensive for many firms), and (ii) raising net capital requirements, up from the minimum of $5,000 for small brokerage firms (also too expensive).


  • Some say that a national recovery pool would create perverse incentives in the industry, encouraging brokers with arbitration awards against them to leave the business because they know their clients will be made whole."


  • Still others say that "the focus should be on preventing fraud and wrongdoing in the first place," while suggesting that investors be more diligent in picking their financial advisors and understanding their investment advice.