Critics say Finra proposal on unpaid arbitration awards doesn’t go far enough

Critics say that Finra did not go far enough to remedy unpaid arbitration awards with the recent proposals advanced by the broker-dealer regulator’s board.

At its May 10 meeting, the Financial Industry Regulatory Authority Inc. authorized a proposal to give customers in arbitration proceedings greater latitude to withdraw and file in court if a brokerage or a broker “becomes inactive during a pending arbitration.” It also approved amending Form U4 to gather information from brokers about times when they have welched on arbitration awards, settlements and judgments.

Those moves didn’t satisfy Sen, Elizabeth Warren, D-Mass., who has been pushing Finra to reform its arbitration system.

“Sen. Warren believes this change doesn’t begin to address the problem, and that Finra needs to create a pool to cover unpaid arbitration awards so that investors who have been ripped off by Finra-registered brokers can recover their savings,” Lacey Rose, a spokeswoman for Ms. Warren, wrote in an email.

Andrew Stoltmann, a Chicago securities attorney, also said that Finra’s proposals came up far short of an insurance fund.

“It literally will have zero impact on the problem,” said Mr. Stoltmann, who is in line to become president of the Public Investors Arbitration Bar Association. “They put de minimus window dressing on Finra’s biggest black eye.”

Last year, PIABA released a report showing that in 2013, arbitration victors were unable to collect $62 million in awards.

Finra president and chief executive Robert Cook said that the self-regulator did not conclude its efforts at the last board meeting.

“We expect to have further conversations at the board about different ways of addressing [unpaid arbitration awards] and how to think about the issue,” Mr. Cook said on the sidelines of Finra’s annual conference on May 16.

Alan Wolper, a partner at Ulmer & Berne, criticized Finra for pursuing an unneeded arbitration change because brokers already can be barred for not fulfilling arbitration losses.

“Being thrown out of the industry would seem to be a much greater incentive [than what Finra recently proposed], and that already exists,” Mr. Wolper said. “It’s an attempt to appease PIABA and Congress.”

But George Friedman, who served as director of Finra arbitration from 1998-2013, said the Finra board took a significant step with its proposals. Previously, Finra allowed clients to take a defunct brokerage to court prior to initiating an arbitration proceeding. Now, Finra is allowing clients to shift gears and go to court while arbitration is underway.

“To change in the middle is a big deal,” said Mr. Friedman, owner of an eponymous consulting firm. “It’s unprecedented in my experience.”

Finra is moving slowly but surely to address weaknesses surrounding arbitration payments, he said.

“Finra tends to work incrementally,” Mr. Friedman said.

Related Topics: Financial Industry Regulatory Authority