Sen. Warren introduces bill targeting unpaid Finra arbitration awards

Legislation directs the regulator to use fines to establish a pool of money to cover shortfalls

Mar 6, 2018 @ 5:11 pm

By Mark Schoeff Jr.

[Correction: Finra chief executive Robert W. Cook testified before a House Financial Services subcommittee in September 2017, not before the Senate Banking Committee meeting of last year referenced in this story. He was not present at that meeting.]

Sen. Elizabeth Warren, D-Mass., introduced legislation Tuesday that would require Finra to create a fund to cover unpaid arbitration awards.

Under Ms. Warren's bill, the broker-dealer self-regulator would draw from the fines it assesses on member firms for violating Finra rules to establish a pool of money to cover arbitration shortfalls.

Ms. Warren, a member of the Senate Banking Committee, has been pressing Finra about the ongoing problem of customers being unable to collect awards when brokerages go out of business or otherwise fail to pay after an arbitration decision.

In a 2016 hearing, she questioned former Finra chairman and chief executive Richard Ketchum about the situation. She also brought up the topic during a banking panel meeting last year.

In a fact sheet on the bill, Ms. Warren indicated she is getting impatient with Finra on the issue.

"Finra has the authority to make sure defrauded investors don't get stiffed — and this bill will make sure it uses it," Ms. Warren said in a statement. "Unpaid arbitration awards have cost ordinary investors hundreds of millions of dollars over the years. Finra is supposed to be looking out for them, not the brokers and dealers who cheat them."

Finra is addressing unpaid arbitration awards, according to spokeswoman Michelle Ong.

"Finra has taken many steps in recent years to use the tools within its power to help customers recover the awards they are owed," Ms. Ong said in a statement. "Through the discussion paper that we released last month, we have outlined many options and issues that should inform the development of further measures to enhance customer recovery. This issue is unfortunately not unique to Finra's forum or the broker-dealer industry."

The Finra board has advanced proposals over the last year targeting unpaid arbitration, but they have not involved establishing a fund to pay awards when brokers welch. The report Finra released in February listed several solutions, many of which required congressional authorization or the help of other regulators.

The Public Investors Arbitration Bar Association study in 2016 showed that about $62 million in arbitration awards went unpaid in 2013. On Wednesday, PIABA is set to release another report that shows that between 2012-16, about 27% of arbitration awards, or about $200 million, went unpaid.

Ms. Warren's bill "is a wonderful development for investors," said PIABA president Andrew Stoltmann. "Finra has been unwilling to act on this issue for decades, and now we need a congressional fix."

Democrats have highlighted unpaid arbitration, but Republicans have not elevated it. Nonetheless, Mr. Stoltmann said bipartisan support could be built for Ms. Warren's bill because it does not require federal funding for the Finra awards pool.

"The prospects for this bill are very positive," he said. "The reason is because it won't cost taxpayers a dime."


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