FINRA Calls Attention to Customer Recovery Issues

In a newly published paper, FINRA examined the issue of unpaid arbitration awards in the financial services industry and explored ways to improve outcomes for the FINRA arbitration forum.

Historically, FINRA has addressed unpaid arbitration awards through, among other actions, the suspension of member firms and individuals for non-payment. In this paper, FINRA identified additional steps that could be taken that would require action by the SEC or Congress. Those steps include:

  • SEC rulemaking to require firms to maintain additional capital;
  • Congressional legislation that would expand the scope of the Securities Investor Protection Corporation (“SIPC”) to include unpaid customer arbitration awards;
  • Legislation or rulemaking that would obligate firms to carry insurance to cover unpaid awards;
  • Legislation or rulemaking that would establish a second brokerage industry fund (distinct from SIPC);
  • An amended SEC Form BD that would require firms to disclose unpaid awards;
  • Legislation to amend the statutory disqualification definition under the Securities Exchange Act; and
  • Legislation to amend the Bankruptcy Code to prevent arbitration awards from being discharged in bankruptcy.

FINRA also made public certain data on unpaid customer arbitration awards from the past five years, and discussed plans to collaborate with other regulators on alternative approaches.

Separately, FINRA proposed amendments to its Membership Application Program rules to improve the timely payment of arbitration awards (see related coverage).

Lofchie Comment: FINRA should not address the issue of unpaid arbitration awards through an expansion of SIPC insurance. That fund is intended solely to remediate custodial claims. If it is turned into a general antifraud insurance fund, not only will the costs of maintaining the fund balloon, but those costs will be borne by firms and their customers who have nothing to do with generating them and exert no control over them.

 

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