The Financial Industry Regulatory Authority has proposed new legislation aimed at curtailing the growing problem of unpaid arbitration awards, particularly those against brokerage firms that either become inactive or declare bankruptcy. According to FINRA, most unpaid customer arbitration awards are rendered against inactive brokerage firms or individual brokers, meaning those whose registration has been terminated or suspended, or those who have been expelled from FINRA. The new legislation, which was sent to the Securities and Exchange Commission in late November 2019, closed its comment period during December.
If passed, the proposed legislation would amend the Code of Arbitration Procedure for Customer Disputes to allow investors to move a case from arbitration to the court system if the brokerage firm becomes either inactive or bankrupt during a pending arbitration. In such situations, the proposal also would allow investors to amend pleadings, postpone hearings, move for default proceedings, and receive refunds of filing fees.
According to Richard Berry, FINRA’s Execute Vice President and Director of Dispute Resolution, nearly a third of all cases that go to arbitration and result in an award of damages to the customer go unpaid. While an overwhelming majority of customer disputes before FINRA are resolved by settlement, the problem of unpaid arbitration awards has nonetheless attracted attention from legislators.
In March 2018, Sen. Elizabeth Warren (D-Mass.) proposed the Compensation for Cheated Investors Act, which sought to establish a pool that would be funded by penalties collected from broker-dealer members to reimburse defrauded investors for unpaid arbitration awards. In support of her bill, Sen. Warren stated that unpaid arbitration awards “have cost ordinary investors hundreds of millions of dollars over the years,” adding how “FINRA is supposed to be looking out for them, not the brokers and dealers who cheat them.” In comparison to Sen. Warren’s bill, FINRA’s recent proposals are more temperate attempts to protect investors and the public interest.
Troutman Sanders LLP regularly represents financial services institutions and their associated persons – including brokers, financial advisors, and other registered representatives – in FINRA arbitrations, securities industry disputes, and regulatory matters involving customer, employment, and intra-industry claims.