As the Financial Industry Regulatory Association’s arbitration system faces mounting criticism for being too costly for investors, some industry observers are countering with a little-discussed fact: Investors routinely fail to pay a large portion of their securities arbitration bills.
IRVINE, Calif. — As the Financial Industry Regulatory Association’s arbitration system faces mounting criticism for being too costly for investors, some industry observers are countering with a little-discussed fact: Investors routinely fail to pay a large portion of their securities arbitration bills.
And when investors “dine and dash,” it’s industry members who ultimately pick up the tab, critics say.
Last year, NASD recognized total arbitration-fee revenue of $56 million. In 58% of the 1,011 customer cases that were closed with a hearing, investors received no damage awards, according to New York and Washington-based FINRA.
Although FINRA sends letters to delinquent claimants asking for payment, and eventually turns unpaid bills over to a collection agency, it stops short of suing investors for payment, according to observers.
It would be a “PR nightmare” for FINRA to sue investors who have lost an arbitration, said Rick Ryder, president of The Securities Arbitration Commentator newsletter in Maplewood, N.J.
“We use prudent business measures to collect,” said FINRA spokeswoman Sarah Bohn.
“We would consider legal action to recover fees owed,” she said. “I believe those types of decisions have been made, but I don’t know specifics.”
It isn’t known how much of what is billed in fees goes unpaid.
“We don’t maintain statistics on unpaid fees,” Ms. Bohn said.
One industry arbitrator, who asked not to be identified, said he asked NASD about the bad debts, but got nowhere.
“They were very touchy about it,” he said. “But I think the industry is left picking up the tab.
“I’ll bet there’s a 90%-plus failure rate [to pay fees]” when clients lose, the arbitrator added. “Over 20 years, the amount owed to NASD has got to be in the mega-millions.”
Firms bear about 75% of the dispute resolution fees and investors pay 25%, Ms. Bohn said.
Costly disputes
Hearings with three arbitrators cost each party to a dispute $600 to $1,200 a day, and often last a week or more.
Other fees may also be charged. Arbitrators have discretion to allocate the fees as they see fit, but in most cases the hearing fees are split between the parties, observers say.
Although both investors and brokerage firms must pay some filing fees up front, those charges are usually only a fraction of final costs.
“If [claimants] think they got a fair shake [in a hearing], they pay,” said Curtis Carlson, a plaintiff’s attorney at Carlson & Lewittes PA in Miami. “If they feel they were shafted, they rarely pay.”
“It’s hard to get money from them [if the] customer [loses and] already believes they were in an unfair forum,” said David Robbins, a partner at Kaufmann Feiner Yamin Gildin & Robbins LLP of New York, and a public member of FINRA’s arbitration committee.
He represents investors in arbitrations.
FINRA also has an unwritten hardship waiver for parties who are unable to pay, according to Mr. Robbins.
“They do take on a lot of bad debt,” he said.
Fees in the spotlight
On the other hand, firms and brokers have no choice but to pay arbitration fees.
If they don’t, they face revocation of their licenses.
Nevertheless, arbitration fees are in the spotlight.
Last month, legislation was introduced in both the House and Senate that would outlaw pre-dispute arbitration agreements for consumer and other types of claims.
“Filing fees and other expenses in arbitration can result in much higher costs for the parties than civil actions,” according to the Democratic sponsors of the bills, Sen. Russell D. Feingold of Wisconsin and Rep. Henry C. Johnson Jr.
of Georgia.
The Washington-based North American State Securities Administrators Association Inc. is also raising similar concerns.
But those in the industry don’t always see the cost issue the same way as consumer advocates.
“I’m sure the [payment defaults] are built into the surcharges,” Mr. Ryder said.
FINRA makes “substantial efforts to get enough in ... deposits to cover the ultimate cost,” he said.
A claim for $100,000, for example, requires a $1,425 filing fee from an investor, but a firm pays $2,125 for the same-size case.
The maximum filing fee for investors is $1,800. For firms it’s $3,700.
Firms also pay a surcharge of up to $3,750 when they file a claim and when they are sued.
For the $100,000 damage claim, they would pay an additional $1,700 surcharge.
Firms get a refund of the surcharge if the arbitration panel denies all a customer’s claims and allocates all the fees against the customer.
Additionally, firms pay all arbitration costs when sued by an employee for a statutory discrimination claim, except for a $200 filing fee paid by the claimant.
Plaintiff’s attorneys such as Mr. Steiner say that whatever share of costs the industry pays, Wall Street still benefits from arbitration.
“With a good [investor] case, why would you want to be in arbitration?” he asked. “In court, you much more often get full damages.”
That is why the industry wants to keep mandatory arbitration, Mr. Steiner said.
