Finra unpaid arbitration increased in 2017, PIABA report finds

Lawyers group calls on broker regulator to set up fund to compensate investors

Mar 7, 2018 @ 2:30 pm

By Mark Schoeff Jr.

Lawyers representing customers in Finra arbitration released a report Wednesday asserting the number of awards that went unpaid rose in 2017, and called on the broker regulator to establish a fund to compensate investors.

The study by the Public Investors Arbitration Bar Association analyzed $73 million in arbitration awards last year. Based on the fact that $20.6 million involved unregistered brokers, PIABA estimates that 36% of 2017 awards were not paid and that 28 cents of every dollar won by customers went uncollected.

In February, the Financial Industry Regulatory Authority Inc. released for the first time statistics about unpaid arbitration that showed that between 22% and 30% of awards went uncollected each year between 2012-16, totaling nearly $200 million.

"The persistent problem of unpaid arbitration awards at Finra has gotten even worse," PIABA president Andrew Stoltmann told reporters on a conference call.

Over the last year, the Finra board has advanced proposals to increase transparency about brokers who fail to pay arbitration awards and to make it easier for clients to pursue in court claims against brokerages that become inactive during an arbitration proceeding.

"The steps Finra has taken thus far have not effectively addressed the problem," said Mr. Stoltmann, a securities attorney. "They haven't provided any relief to investors who were given an award that went unpaid."

Finra said it is addressing the problem.

"Finra has taken many steps in recent years to use the tools within its power to help customers recover the awards they are owed," Finra spokeswoman Michelle 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."

In the paper, Finra said "Congress or the SEC should be involved in any decision to create a second brokerage industry fund for unpaid arbitration awards."

The solution that PIABA is promoting is the same one Sen. Elizabeth Warren, D-Mass., included in legislation she introduced Tuesday. The group wants Finra to establish a fund to cover unpaid arbitration awards using fines it collects from firms that violate Finra rules.

Mr. Stoltmann said Finra could set up such a fund now through its own rulemaking, but so far "they've been unwilling to do it."

Hugh Berkson, a securities attorney and co-author of the PIABA report, noted that there was $14 million in unpaid arbitration awards in 2016, a year in which Finra collected $173.8 million in fines.

"There's an undeniable logic to using the fines assessed against Finra's bad actors to ensure that investors who fall victim to inappropriate broker conduct are made whole," Mr. Berkson said. "We know the fines Finra has collected are more than sufficient to fund the pool."

Other ways PIABA suggested to fund unpaid arbitration included having Finra take the money out of any budget surplus it achieves each year, or assessing a fee on the approximately 630,000 registered representatives it oversees.

The Financial Services Institute, which represents independent broker-dealers and financial advisers, favors using Finra fine money rather than increasing Finra member fees.

"We strongly believe the solution to this problem should not require those who honor their obligations to bear the burden of the bad acts of those who do not," FSI vice president of regulatory affairs and associate general counsel Robin Traxler said in a statement about Ms. Warren's bill. "The good should not suffer because of the bad. So we are encouraged by the bill's language that would require the fund come from penalties paid by brokers."

The idea of Finra using its surplus to fund unpaid arbitration didn't sit well with George Friedman, a former director of Finra arbitration who is now an adjunct professor at Fordham Law School. It could create a situation in which Finra may hope that customers don't win arbitration cases, he said on the PIABA conference call.

Finra unpaid arbitration
Source: Financial Industry Regulatory Authority Inc.

"It concerns me that they're being set up in opposition to successful investors," Mr. Friedman said.

No matter how the unpaid arbitration pool is funded, the beneficiaries could be someone like Bruce Wilkerson, an NFL offensive tackle from 1987-98 who played in two Super Bowls with the Green Bay Packers.

Mr. Wilkerson, 53, said he entrusted his "entire life savings" to broker Robert A. Gist of Resource Horizon Group. Mr. Gist reached a $5.4 million fraud settlement with the Securities and Exchange Commission in 2013, and Mr. Wilkerson won a $610,000 Finra arbitration award in 2015.

But before the award was issued, Finra canceled the brokerage's registration, and Mr. Wilkerson failed to receive his award. Mr. Wilkerson now works as a machinist in Tennessee.

"I lost most of my net worth and then lost it all over again due to unpaid arbitration," Mr. Wilkerson said on the PIABA conference call. "I will most likely be working many years into my late 60s to earn back the savings I lost, and perhaps never fully retire."

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