Vermont establishes restitution fund for victims of investment fraud

Portion of settlements with financial perpetrators would supply the pool.

Vermont victims of investment fraud will be more likely to recover money thanks to a restitution fund the state created this week.

The state will supply the fund by siphoning a portion of monetary settlements from securities enforcement cases, according to Vermont Commissioner of Financial Regulation Michael Pieciak.

He said somewhere between 12% and 15% of settlements will be diverted to the restitution fund. Last year, the state assessed about $3 million in penalties for securities violations.

Under the rules for the fund, victims can obtain the lesser of $25,000 or 25% of restitution awarded within two years of a final order. Vulnerable persons, including those age 60 and over, could receive the lesser of $50,000 or 50%.

The fund was created as part of a bill approved this year in the Vermont legislature. The goal is to give victims of financial rip-offs a way to recover some money when the perpetrators have already blown through ill-gotten gains.

“These would be folks who would be otherwise uncompensated,” Mr. Pieciak said.

Vermont joins Indiana and Montana in establishing restitution funds. Other states may follow.

“These are conversations we have to have because these funds provide real benefits to investors,” said Mr. Pieciak, who also is president of the North American Securities Administrators Association.

Christine Lazaro, president of the Public Investors Arbitration Bar Association, said restitution funds are a good idea.

“In terms of investor protection, it’s an important step in ensuring that investors who are harmed are given some recovery,” said Ms. Lazaro, who also is a law professor at St. John’s University.

The Vermont fund arrives while the Financial Industry Regulatory Authority Inc. grapples with the problem of unpaid arbitration awards.

“We would like to see Finra use its fine money to help provide restitution to investors who go through the arbitration process,” Ms. Lazaro said.

During a session on unpaid arbitration last year at a meeting of the Securities and Exchange Commission’s Investor Advisory Committee, the Financial Services Institute warned that a fund for arbitration victims should not be funded by brokerages that have done nothing wrong.

Although the Vermont fund taps money only from violators, FSI is wary of the state’s approach.

“Similar to the arbitration fund, we would be concerned that the existence of the fund would lead to Vermont bringing additional enforcement matters and/or increase enforcement fines in order to fund the pool,” Robin Traxler, FSI senior vice president of policy and deputy general counsel, said in a statement. “We encourage Vermont to monitor their statistics around enforcement matters and fines to ensure these are not increasing because of the existence of the fund.”

A recent Finra rule proposal would require rogue brokerages to shift money to an account controlled by Finra that could be used in part to fund unpaid arbitration awards.