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.
