The Financial Industry Regulatory Authority Inc. is doing a lousy job at helping investors collect arbitration awards for damages from their brokers, according to the Public Investors Arbitration Bar Association.
Seventy-five Finra arbitration
awards, or about one-third of the total number handed down in 2013, were unpaid according to a report released today by
PIABA. That translates into $62 million of award money, or about 25% of the total owed to investors for damages in that year, the report said.
PIABA, a not-for-profit bar association of lawyers who represent investors in securities arbitration and litigation, called those findings “unconscionable” in the report.
Finra, the brokerage industry's watchdog, typically doesn't publish what portion of total awards go unpaid each year and isn't doing enough to fix the problem, according to PIABA. The report said that most brokerage firms are underfunded, setting aside a “surprisingly” small amount of net capital that could be used to meet those payments.
“The arbitration award is meaningless if the broker or brokerage firm does not have the resources to pay the award,”
Hugh Berkson, the president of PIABA, wrote in the report. “Unfortunately, this is an all too common problem, and has been for quite some time.”
Michelle Ong, a spokeswoman for Finra, said the regulator remains “very concerned with awards to investors that go unpaid.” In an email, she said Finra is exploring “a number of solutions and welcomes input from interested parties.”
More than half of the more than 4,400 broker-dealers maintained less than $500,000 in net capital at the end of 2012, according to the PIABA report, which cited data released by the Securities and Exchange Commission in January 2014. Opponents to boosting net capital requirements say a significant increase would cut into profit margins and put firms out of business, PIABA said.
“Brokerage firms make direct pleas for investors to maintain financial health,” Mr. Berkson wrote in the report. “There is more than a small amount of irony in the fact that so many brokerage firms do not follow their own advice and fail to ensure that they can withstand customer claims arising from sales practice violations.”
Finra has considered requiring brokers to carry insurance to help them cover arbitration awards, but decided against it, according to PIABA, which is pushing for the formation of a national recovery pool to help investors collect awards. The pool would be funded by contributions from Finra member firms.
“The vast majority of investors who learn that their broker and his or her firm have no liability insurance coverage are stunned,” Mr. Berkson wrote. The likelihood of collecting a “significant award” is compromised.
