The North American Securities Administrators Association (NASAA) approved a model rule for states that would make it easier for state regulators to pursue registrants who’ve failed to pay financial awards imposed during customer arbitration.
“Broker-dealers and investment advisors should promptly pay any arbitration awards or regulator-imposed fines, and if they do not, this model rule provides state regulators with another means to take action against them,” NASAA President Melanie Senter Lubin said.
NASAA’s Broker-Dealer Section Committee and Investment Adviser Section Committee helped prepare for approval the rule, which would make it a “dishonest or unethical practice” for registrants to not pay an investment-related, customer-initiated arbitration award, as well as any related fine or civil penalty levied by the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) or state securities regulators.
The association wants the model rule to offer an additional basis for states to bring enforcement actions against delinquent individuals and firms. The model rule (which is available on NASAA’s site) would allow customers and registrants to agree to binding alternative payment arrangements. NASAA first proposed the model rule last October.
By marking unpaid arbitration awards as a fraudulent or prohibited practice, state regulators would be empowered on two fronts, according to Brett Olin, vice-chair of NASAA’s Broker-Dealer Section Committee and Nevada Securities Division’s enforcement chair. By labeling unpaid awards as such, a regulator could stop an advisor from registering in their state until the award was paid. If the advisor is already licensed, regulators could levy fines or even bar that advisor from practicing in-state.
“It opens up the whole system for the state to see that the remedy that’s already been ordered in arbitration actually gets enforced,” Olin said.
While FINRA can bar individuals from working with FINRA-registered firms and can pull the registration of delinquent firms, registrants can often remain in business under the jurisdiction of state regulators. According to the Public Investors Advocate Bar Association (PIABA), the problem is getting worse; in an analysis, PIABA found that 19 of FINRA’s 64 total publicly available arbitration awards in 2020 went unpaid, accounting for about 24% of the awarded money that year.
Olin expects the NASAA model rule to be adopted by approximately half the states within two years and anticipates widespread support among regulators, considering state regulators on the Broker-Dealer and Investment Adviser committees, as well as the full NASAA board, already had signaled their approval.
“You already have 15 states doing a lot of work to get this rule to where it is now,” he said.
Earlier this week, NASAA submitted a letter to FINRA responding to a request for comment on proposed rules that would speed up arbitration proceedings for certain customers, including the elderly and seriously ill. While NASAA reiterated its opposition to mandatory arbitration clauses, it supported FINRA’s proposal to make the process as quick as possible for those investors.
“NASAA would not support this objective if we thought the Proposal might threaten claimants’ rights or if it were used as a tool by defense counsel to attempt to circumvent discovery in the guise of moving the matter along expeditiously,” the letter read. “We believe, on whole, that the Proposal poses little risk for claimants, if properly administered by FINRA’s dispute resolution staff.”
The investment advisory side of customer arbitration is also garnering scrutiny from investor protection advocates. This week, groups, including PIABA, the Consumer Federation of America and Better Markets, sent a letter to the SEC urging the commission to gather and publish data on RIAs’ use of predispute arbitration clauses, decrying the murkiness in understanding how mandatory arbitration affects RIA clients.
“This lack of transparency is particularly troubling in the context of recent trends in the securities industry, which show mass migration of assets from FINRA-registered broker-dealers to SEC- and state-registered RIAs,” the letter read.
