State regulators encourage brokerages to use insurance to fund arbitration losses

State regulators encourage brokerages to use insurance to fund arbitration losses
NASAA says step would help address problem of unpaid arbitration awards
DEC 11, 2019
State securities regulators encouraged brokerages Wednesday to use insurance to fund arbitration payouts to customers who win disputes, saying it would help reduce the number of unpaid awards. The North American Securities Administrators Association released a survey of 64 firms that showed that 77% of them carried errors & omissions insurance, while 23% did not carry insurance. Of the firms participating in the survey, 23% reported paying at least one E&O claim over the past year, and 17% reported that an arbitration claim was paid by insurance. Most of the firms in the study were small, according to NASAA. The survey showed that at least 28 insurance carriers offered E&O policies. State regulators see insurance coverage as part of the answer to the growing problem of unpaid arbitration awards. 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, according to Financial Industry Regulatory Authority Inc. statistics. Finra runs the arbitration system for brokers. "The survey results reveal that the majority of the responding firms had E&O insurance and that their policies have paid claims," the NASAA report states. "Further, the results of the survey contradict the blanket assertion that E&O insurance is too expensive or too difficult for smaller firms to obtain." The NASAA report acknowledged that E&O insurance often excludes claims that are made in arbitration cases, such as fraud, sales of alternative products and selling away by a registered representative. It also said E&O doesn't solve some major causes of unpaid arbitration. "Because E&O insurance may not necessarily address awards against inactive firms or claims involving fraud or other excluded conduct, it is not a complete solution to the problem of unpaid arbitration awards," the report states. [Recommended video: Connecting the dots for the future of advice] In 2018, Finra released a report outlining several steps that could be taken to address unpaid arbitration, including legislation or regulations requiring firms to carry insurance to cover unpaid arbitration awards. The report said unpaid arbitration is a problem requiring a response from Congress and several regulators. "We look forward to reading NASAA's report," Finra spokeswoman Michelle Ong wrote in an email. One critic of the Finra arbitration system praised NASAA for holding Finra's feet to the fire. "Finra was hoping the unpaid arbitration issue would blow over and disappear," said Andrew Stoltmann, a Chicago securities attorney and a board member of the Public Investors Arbitration Bar Association. "But to NASAA's credit, it remains a critical issue for the organization." State regulators are trying to spur action on unpaid arbitration awards. "We appreciate that this issue is complicated and are pleased that Finra and others are studying it," Christopher Gerold, chief of the New Jersey Securities Bureau and NASAA president said in a statement. "But this problem is not fixing itself." Mr. Stoltmann said the NASAA insurance suggestion is helpful. "It's an important step, and one that will cure part of the unpaid arbitration problem," Mr. Stoltmann said. "The best solution remains an industry funded unpaid arbitration pot."

Latest News

Roughly three-fifths of Americans agree on higher taxes for large corporations, higher-income households
Roughly three-fifths of Americans agree on higher taxes for large corporations, higher-income households

Pew survey reveals slight majority consensus on tax rates, but views splinter based on political alignment and income levels.

The Fed's going to cut rates
The Fed's going to cut rates

While the Federal Reserve's decision to hold interest rates steady in March was widely expected, it's the reactions from financial professionals that provide a more nuanced picture of the central bank's approach.

Ontario Pension Fund revamps PE business in light of global risk
Ontario Pension Fund revamps PE business in light of global risk

The pioneering member of Canada's Maple Eight is stepping back from its go-it-alone private equity approach as a drought in deals and Trump's trade war prompt a rethink.

Raymond James, RBC reel in UBS advisors managing over $690M in assets
Raymond James, RBC reel in UBS advisors managing over $690M in assets

The firms' latest additions in Florida and Nevada come as a strategic change at UBS raises risk of advisor defections.

Assetmark debuts new advisor succession planning program
Assetmark debuts new advisor succession planning program

The new program offers opportunities and events structured for rookies, next-gen advisor leaders, and soon-to-exit veterans.

SPONSORED Beyond the all-in-one: Why specialization is key in wealth tech

In an industry of broad solutions, firms like intelliflo prove 'you just need tools that play well together'

SPONSORED Record growth: Interval funds emerge as key players in alternative investments

Blue Vault Alts Summit highlights the role of liquidity-focused funds in reshaping advisor strategies