For firms that don’t pay their arbitration awards, Wall Street’s self-regulator plans to bar them from the industry and could seek to impose new rules to make collecting awards easier for investors.
In testimony before the Senate Committee on Banking, Housing and Urban Affairs on Thursday, FINRA’s CEO Rick Ketchum took a harsh stance on firms that do not pay up when arbitration panels award damages to investors.
“With respect to any firm that continues to do business in the securities industry, unless they leave and become a registered investment advisor, we will bar them if they don’t pay their awards. Plain and simple as that. No one can stay in as a FINRA member and not pay their arbitration awards,” Ketchum explained in response to a question from Senator Elizabeth Warren (D-MA).
Senator Warren questioned whether industry self-regulation really works, pointing to two recent studies that showed brokers and firms put consumers at risk through unpaid arbitration awards and unchecked advisor misconduct.
“I think something should be done about both these brokers and dealers who put investors at risk. FINRA is supposed looking out for these folks, not advisory firms,” Warren said. “We’re talking about real risk here.”
Warren referred to the academic research released Monday that showed one out of every 13 FINRA-registered financial advisor had a history of misconduct, as well as the report released last week by the Public Investors Arbitration Bar Association (PIABA) that found that over $60 million in arbitration awards to investors in 2013 remain unpaid.
Ketchum responded that the regulator was looking at these issues and, in the case of the unpaid awards, argued that many of the firms or brokers at issue were no longer registered members of FINRA; therefore, they fell outside the organization’s purview.
“We have a great deal of concern about firms becoming insolvent and leaving FINRA. In those situations, we lose our jurisdiction and from the standpoint of barring them, they’re already gone. That is a big problem,” Ketchum said.
Currently under FINRA Rule 9554, the regulator proactively suspends firms and brokers that do not pay arbitration awards. For each suspension, FINRA makes a note on the records of the firm or broker regarding the non-payment and prevents them from re-entering the securities industry until the award has been satisfied.
When Warren pressed the issue, asking specifically if all the firms or brokers with unpaid awards from 2013 were gone, Ketchum responded they were. “I’m saying those who have not paid will either be in a short period of time barred, or already out. With respect to those firms [from three years ago], they are gone. Those are firms that have left FINRA and the collection issues are the exact same collection issues as when a firm goes insolvent,” he said.
But PIABA’s investigation found that of the 75 unpaid awards from 2013, 51 were against a person or firm no longer in the industry. FINRA did not immediately respond to a request for clarification of the outstanding arbitration award situation on Thursday.
Going forward, Ketchum noted that FINRA plans to review the capital requirements at firms to determine if they are at the right level, although he noted that was essentially something for which the Securities and Exchange Commission has taken responsibility.
Additionally, Ketchum said the regulator would explore whether there should be “jumps” before a firm leaves FINRA to ensure they have left enough capital to meet any obligations that may come forward.
“One way or another, there should be a fund to address this for small investors who are harmed by this,” Ketchum said, echoing an idea proposed in the PIABA report for a national recovery pool.
Hugh Berkson, PIABA president and author of the report, said Thursday that a recovery pool was the most viable solution and could be put forward through a FINRA rule proposal.
“The expense would be minimal,” he added, noting that by assessing a $100 fee per broker, FINRA would be able to fund a pool of over $60 million. “If there was the will to do this, it could be done in short order.”
Updated March 4, 2015 at 12:15 p.m. to include additional information regarding FINRA's current suspension activities.
