The Securities Industry and Financial Markets Association is demanding that regulators end the practice of brokers' pleading poverty to avoid paying back promissory notes — even when ordered to by an arbitration panel.
In a letter sent last week to the Securities and Exchange Commission, SIFMA asked that the SEC and the
Financial Industry Regulatory Authority Inc. address in writing SIFMA's concerns about individual brokers who plead poverty to get out of paying back promissory notes, as well as the lack of disclosure when they don't pay.
Finra dismissed SIFMA's comments as not falling within the scope of a recent rule change relating to disciplinary disclosures. The SEC approved the change in June.
“Consequently, the public-comment and rule approval process, and the substantive record on this matter, are incomplete and fail to address a key investor protection issue,” SIFMA wrote.
The trade group asked that “the SEC address in writing, and cause Finra to address in writing, the disclosure, transparency and investor protection concerns” raised in the SIFMA letter.
SIFMA wants Finra to eliminate the inability-to-pay defense that individual brokers can use to get out of paying back promissory notes, or at the very least, require public disclosure when a broker successfully uses that defense. It argues that significant investor protection issues come into play if customers are not told that their broker has encountered financial difficulties.
“This is an incredibly important piece of disclosure,” Kevin Carroll, SIFMA's associate general counsel, said in an interview. “We're frustrated that we can't get regulators to pay attention to it.”
SIFMA has been hounding regulators on the issue for several years.
It first raised its concerns in a November 2011 letter to Finra and again in an April 2013 comment letter on the recent Finra rule change.
Unpaid notes are a serious concern for securities firms.
The use of promissory notes grew after the financial crisis, when many registered representatives took recruiting deals from competing firms or were offered retention packages. These deals are done with forgivable promissory notes.
But brokers have to pay back the residual amount owed when they leave a firm, or risk an arbitration claim by their former employer. If a broker can show an inability to pay back a note, though, he or she can avoid suspension and still go to work at another firm.
In 2010, Finra eliminated the inability-to-pay defense for awards involving customers. In these cases, if brokers can't pay, they must file for bankruptcy or face suspension.
SIFMA wants the same standard applied to intraindustry disputes such as promissory-note cases.
But brokers can’t simply claim they have no money, said Jim Eccleston, of the Eccleston Law Offices PC.
Defaulting brokers are turned over to Finra enforcement staff, who “investigate the veracity of the claim that the person has no money,” he said.
In one case he handled for a former
UBS Financial Services Inc. broker, Mr. Eccleston said Finra sent his client a “20-page questionnaire asking to describe under oath your assets, liabilities and cash on hand.”
If a broker fails to prove an inability to pay, he or she “will be suspended or required to pay,” he said.
Firms can also ask courts to confirm arbitration awards as judgments, Mr. Eccleston added, which gives them authority to pursue collection activities, make the broker prove poverty in court proceedings, or garnish a rep’s wages.
“I think anyone at the SEC looking at this will say to the industry, ‘You have adequate remedies’” to collect, he said.
Finra spokeswoman Michelle Ong and SEC spokesman John Nester declined to comment.
