By Kevin Kulling, J.D.
One out of three investor awards from FINRA arbitrations brought in 2013 have not been paid, according to a report issued by the Public Investors Arbitration Bar Association (PIABA). PIABA, which characterizes the level of unpaid awards as “unconscionable,” is calling for the securities industry to fix the “glaring” non-payment problem and recommends the establishment of a national recovery pool.
The PIABA report. The report’s conclusions are based on a PIABA review of every arbitration award issued in 2013. PIABA found 225 arbitration awards in which some amount of damages was awarded. Citing statistics in a report from the FINRA Arbitration Task Force, PIABA said there were 75 awards issued in 2013 that went unpaid. That means 33 percent of awards in claimants’ favor went unpaid in the context of the number of awards issued, according to the report. PIABA also calculated that for 2013, awards to investors totaled over $256 million, with unpaid awards amounting to $62.1 million, or 24 percent of the total.
The PIABA report concluded that FINRA’s current “cure” for unpaid awards−barring from the industry those who fail to pay awards and notifying claimants that they can pursue actions in court against former FINRA members−has failed to put a meaningful dent in the problem.
PIABA also cited a 2000 GAO report that found the most frequent reasons for unpaid awards included a broker-dealer going out of business, the broker-dealer claiming to be financially unable to pay the award, the individual broker could not be found, or the broker-dealer filing for bankruptcy.
Recommended solutions. The report discusses several potential ways to address the issue of unpaid awards. PIABA said that potential options include expanding SIPC, increasing net capital requirements for FINRA members, or requiring liability insurance coverage.
The PIABA report also recommended the institution of an “investor recovery pool” that would provide a source of recovery for those investors who have exhausted reasonable efforts to collect their awards from the brokerage firm and/or the broker. “Steps must be taken to put forth a new division of FINRA to craft and administer a national recovery pool,” the report said. The recovery pool proposal calls for the industry and FINRA to fund it.
FINRA task force. FINRA formed its arbitration task force in July 2014 to consider possible enhancements to its arbitration and mediation forum. The 13-member task force issued its final report with more than 50 recommendations in December 2015. The task force and the final report explored the issue of unpaid awards, but did not propose a course of action.