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Posts Tagged ‘Brokers’

FINRA to Pick Up the Check on Unpaid Arbitration Awards?

Posted on: March 8th, 2018

By: Theodore C. Peters

Image result for giving moneyAs recently reported, unpaid FINRA arbitration awards is a growing problem.  As FINRA has acknowledged, roughly one quarter of FINRA arbitration awards issued in 2016 went unpaid.  If lawmakers have their way, FINRA itself may ultimately be stuck with the check, and be required to pay such awards.

On March 6, Sen. Elizabeth Warren, D-Mass, introduced legislation that would require FINRA to compensate investors for unpaid arbitration awards.  The Compensation for Cheated Investors Act would direct FINRA to establish a “relief fund” pool that could be used to provide investors with the full value of unpaid arbitration awards against brokerage firms or brokers regulated by FINRA.  The fund would derive “first from penalties paid by brokers and then from sources determined by FINRA.”  In the event FINRA fails to take steps to establish such a fund, the bill proposed by Sen. Warren would nevertheless require FINRA to compensate investors from its general budget.  The bill also provides that FINRA may require investors to subrogate their claims against brokers, and that FINRA may pursue additional remedies against the brokers.

Also of note, FINRA would not be permitted to limit the amount that an investor may receive from the relief fund, nor would FINRA be allowed to prohibit any investor from submitting a claim to the fund.  FINRA would also be required to annually disclose, among other things, the total number of arbitration awards issued in favor of investors against brokerage firms or brokers under its watch, the number and amount of unpaid awards, and the names of the brokerage firms/brokers at issue.

If you have questions or would like more information, please contact Ted Peters at [email protected].

Unpaid FINRA Awards May Result in Tighter Membership Rules Governing Brokers and Member Firms

Posted on: February 16th, 2018

By: Theodore C. Peters

On February 8, the Financial Industry Regulatory Authority (“FINRA”) released a discussion paper: FINRA Perspectives on Customer Recovery, which openly addressed the reality that roughly one quarter of FINRA arbitration awards issued in 2016 were unpaid.  According to the paper, of the total of 2,457 arbitration cases in 2016, 1,747 were settled, 212 were withdrawn, 389 were closed by award, and 109 were closed “by other means.”  In releasing the paper, FINRA stated that it “hopes to encourage a continued dialogue about addressing the challenges of customer recovery across the industry.”  FINRA also indicated in the paper that it plans to organize discussions with other regulators and policy makers, “to further address the issue of customer recovery, identify additional data or analysis that may help inform effective decision-making in this area, and consider potential courses of action.”

On the same day, FINRA published Regulatory Notice 18-06, addressing its Membership Application Program (“MAP”).  The Notice does not alter FINRA’s current MAP protocols, but it clearly indicates FINRA’s intent to tighten rules governing membership including, among other things, the transfer of a registered persons from one broker-dealer to another when they have unpaid arbitration claims.  “FINRA is proposing to amend the MAP rules to allow FINRA to take a stronger approach to addressing the issue of pending arbitration claims, as well as arbitration awards and settlement agreements related to arbitration that have not been paid in full in accordance with their terms.”

In their current form, MAP rules permit consideration of a pending arbitration against an associated person as a factor in assessing whether the applicant meets the standards for admission.  However, “a pending arbitration does not create a presumption of denial.”  The amendments proposed by FINRA would give its Department of Member Regulation “rule-based authority to preemptively deny an NMA [new member application] if the applicant or its associated persons are subject to pending arbitration claims.”  This presumption would not apply to continuing membership applications. Further, the proposed amendments would allow the applicant to overcome this presumption if he demonstrated his “ability to satisfy the pending arbitration claims.”

In addition, the proposal would disallow certain business expansions where one or more of the associated persons involved have a “covered pending arbitration claim.”  Such claims are defined as “those whose amount (either individually or in the aggregate) exceed the member’s excess net capital.”

Finally, the amendments proposed by FINRA would disallow “any direct or indirect acquisitions or transfers of a member’s assets or any asset, business or line of operation where the transferring member or one or more of its associated persons has a covered pending arbitration claim, unpaid arbitration award or unpaid settlement related to an arbitration” under certain conditions.

The Notice seeks comment on the proposed amendments.  Comments are due by April 9, 2018.

If you have any questions or would like more information, please contact Ted Peters at [email protected].