According to the Public Investors Arbitration Bar Association (PIABA), FINRA is failing to help investors collect arbitration awards for damages from the brokers. Seventy-five FINRA arbitration awards, about a third of the 2013 total, are unpaid according to a report released by PIABA. That is $62 million in award money or about 25% of the total owed to investors for damages that year.
PIABA, which is a not-for-profit bar association of attorneys who represent investors in securities arbitration and litigation, stated that those findings were “unconscionable.” PIABA further claims that FINRA, which usually does not publish the percentage of total awards that go unpaid each year, is not doing enough to help the problem. The report claims that the majority of brokerage firms are underfunded, placing aside a “surprisingly” small amount of net capital that could be used to make those payments.
“The arbitration award is meaningless if the broker or brokerage firm does not have the resources to pay the award, PIABA’s president, Hugh Berkson, stated in the report. “Unfortunately, this is an all too common problem, and has been for quite some time.”
Most of the more than 4,400 broker-dealers maintained less than $500,000 in net capital at the close of 2012, the report states citing information released by the SEC in 2014. Opponents to increasing net capital requirements claim that a large increase would cut into profits so much that it would put firms out of business.
“Brokerage firms make direct pleas for investors to maintain financial health,” Berkson wrote in the report. “There is more than a small amount of irony in the fact that so many brokerage firms do not follow their own advice and fail to ensure that they can withstand customer claims arising from sales practice violations.”
FINRA thought about making brokers carry insurance to assist in covering arbitration awards but ultimately decided not to, claims PIABA, which is pushing for the creation of a national recovery pool to help investors collect awards. This pool would be funded by contributions from FINRA member firms.
“The vast majority of investors who learn that their broker and his or her firm have no liability insurance coverage are stunned,” Berkson wrote. The likelihood of collecting a “significant award” is compromised.
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