Interest groups spar over best way to cover unpaid arbitration awards

PIABA suggests brokerages fund a pool or Finra pay for shortfalls with fines, while FSI asks regulators to ban offenders from all corners of industry

Dec 13, 2018 @ 5:22 pm

By Mark Schoeff Jr.

Who should be on the hook when brokers fail to pay arbitration awards? Interested parties speaking before the SEC Investor Advisory Committee on Thursday disagreed on the answer.

The head of a securities lawyers group told the panel that too many awards are going unpaid and that the entire brokerage industry should fund a payment pool, with higher-risk firms ponying up the most money.

"By shifting the cost of misconduct back to the industry, it will have an incentive to regulate its members and weed out the misconduct, which should result in less harm to investors over the long term," said Christine Lazaro, president of the Public Investors Arbitration Bar Association, and a professor of law at St. John's University and director of its Securities Arbitration Clinic.

From 2012 through 2016, the amount of unpaid arbitration awards has ranged from a high of $75 million in 2013 to a low of $14 million in 2016.

Ms. Lazaro said one option for funding a pool to pay these awards would be through an assessment on Finra firms, with those engaging in high-risk behavior paying more. An alternative option would be to use Finra fine money, an approach at the heart of legislation introduced by Sen. Elizabeth Warren, D-Mass. Ms. Lazaro said Finra fines easily exceeded unpaid arbitration awards from 2014 through 2016.

But Richard W. Berry, Finra executive vice president and director of its arbitration system, cautioned that allocating fines toward an arbitration pool would hurt other Finra programs.

"Our fine money is going for investor protection already," he told the SEC panel.

Robin Traxler, senior vice president and deputy general counsel at the Financial Services Institute, said establishing a fund would encourage reckless behavior by rogue brokers who know they wouldn't have to pay the awards and hurt honest firms that finance the fund.

She also said forcing firms to pay higher insurance rates or increase their net capital would burden small brokerages.

Instead, she suggested banning bad brokers not only from the brokerage industry — which the Financial Industry Regulatory Authority Inc. does when they don't pay arbitration awards — but also from investment advisory and insurance firms through Finra coordination with the SEC and state insurance and securities regulators.

"This would effectively make it impossible for the bad actors to incur an unpaid award and then simply go work in the investment advisory or insurance industries, where they would continue to have access to investors," Ms. Traxler said.

Last week, Finra published for the first time a list of brokers and firms that have failed to pay arbitration awards.

Mr. Berry stressed that tackling the problem of unpaid arbitration would likely require SEC rulemaking or legislation in addition to Finra action.

"All options are on the table on this," Mr. Berry said. "Finra can't solve this problem alone."

The Investor Advisory Committee represents ordinary investors in making policy recommendations to the SEC.

0
Comments

What do you think?

View comments

Most watched

INTV

Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.

INTV

Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.

Latest news & opinion

InvestmentNews' 2019 class of 40 Under 40

Our 40 Under 40 project, now in its sixth year, highlights young talent in the financial advice industry. These individuals illustrate the tremendous potential of those coming up in the profession. These stories will surprise, entertain, educate and inspire.

Galvin to propose fiduciary rule for Massachusetts brokers

The secretary of the commonwealth is proposing a fiduciary standard in response to an SEC investment-advice rule he views as too weak.

Summer reading recommendations from financial advisers

Here are some books that will keep you informed and entertained during summer's downtime

4 strategies for Roth conversions

There's never been a better time to do a Roth conversion, and here are several ways to go about it.

Cetera latest to be hit with data breach of personal information

Company is offering clients complimentary, two-year membership to an identity theft protection and credit monitoring service.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print