By John M. Jascob, J.D., LL.M.
NASAA has criticized a FINRA proposal for not going far enough to solve the problem of unpaid arbitration awards. In a comment letter concerning FINRA Regulatory Notice 17-33, NASAA offered support for FINRA’s efforts to expand customers’ litigation options when a broker-dealer or associated person becomes inactive. In NASAA’s view, however, the proposed amendments fail to address the core of the unpaid arbitration award issue or boost investor confidence in FINRA’s arbitration process.
NASAA noted that the problem of unpaid arbitration awards is well documented. NASAA cited a 2000 report by the Government Accountability Office (GAO) that identified issues with customers failing to collect on arbitration awards, as well as a 2016 report on the same subject by the Public Investors Arbitration Bar Association (PIABA). In response, FINRA offered the proposed amendments as a way to address the challenges faced by investors who are unable to collect monetary damages awarded to them through FINRA Dispute Resolution’s mandatory arbitration process.
NASAA praised FINRA’s attempts to provide investors with additional options to alter their litigation strategy when an industry member goes inactive, such as allowing investors to withdraw claims, amend the pleadings, postpone hearings, and receive a refund of filing fees. NASAA wrote that the proposal does little, however, to provide relief to investors left holding the bag when awards go unpaid and broker-dealers are not held responsible for their misconduct.
NASAA also worries that permitting a customer to withdraw a claim when a broker-dealer or associated person becomes inactive may pose a reporting issue when FINRA Dispute Resolution publishes statistics on customer claim withdrawals. Unless customer claim withdrawals are categorized in a way that references the reason a customer withdrew his or her claim, FINRA’s statistics concerning customer claim withdrawals may be misleading, leading investors and regulators to believe that a customer withdrew a claim because it lacked merit.
Accordingly, NASAA urged FINRA to create a new reporting mechanism providing transparency on industry participants who became inactive due to unpaid arbitrations or judgments in favor of customers. NASAA believes that this statistic would provide investors with important additional information when making a decision about whether to work with a specific FINRA member or associated person.