State regulators propose restitution assistance for harmed investors

NASAA based its model rule on measures in place in Indiana, Montana, Vermont, Kansas and Maine

State regulators released a proposal Wednesday that would guide states in establishing a pool of money to pay back victims of securities violations, who have not yet received money awarded by courts or administrative agencies.

Under the model legislation from the North American Securities Administrators Association, harmed investors would receive financial assistance while awaiting full payment of the restitution they won.

The aid would be capped at the lesser of $25,000 or 25% of the amount of unpaid restitution awarded or the lesser of $50,000 or 50%, if the victim is a senior or other vulnerable person, according to the model legislation.

The measure is based on restitution funds that have been created in Indiana, Montana, Vermont, Kansas and Maine. Indiana established its fund in 2010 and has paid nearly $1 million in restitution assistance to 102 victims, according to a NASAA press release, while Montana has paid $1.6 million to 118 claimants since its fund was set up in 2011. Most recipients were older than 60 in both states.

Restitution funds can help securities fraud victims who often don’t recover much of the money they lose in illegal schemes, NASAA president Christopher Gerold said.

“In many cases, victims of securities fraud are only able to recover pennies on the dollar,” Gerold, chief of the New Jersey Bureau of Securities, said in a statement. “This model legislation would give state securities regulators the ability to provide greater financial relief to victims, which is particularly important to seniors and other vulnerable adults living on a fixed income.”

Unpaid awards have long bedeviled the arbitration system run by the Financial Industry Regulatory Authority Inc., the broker-dealer self-regulator. The Indiana Securities Division says on its website that Finra arbitration awards are not eligible for payment from its securities restitution fund. Montana follows the same policy.

One of the hot buttons of an ongoing debate about establishing a fund for unpaid Finra arbitration awards is how to finance it.

The NASAA model legislation leaves the funding question up to each state but does provide suggestions on sources, including using civil fines, a portion of licensing and registration fees or an appropriation from the legislature. Indiana finances its restitution fund primarily by allocating to it 5% of the proceeds from enforcement actions, said Daniel Spungen, chief deputy securities commissioner.

Paying restitution has become an increasing focus for securities regulators. The Securities and Exchange Commission emphasized it in its recent share-class initiative, and Finra has highlighted it in recent cases.

The NASAA model legislation is open for public comment until July 31. After reviewing the input, the agency could modify the proposal. If approved by members at its annual meeting in September, the model legislation would be available for adoption by individual states.