The Problem of Unpaid Securities Arbitration Awards

Sunday, March 13, 2016

The big players in the securities industry have deep pockets and can afford to settle or pay securities arbitration awards when the lose.  But a recent report shows that there a plenty of small brokers who either can't or won't meet their obligation to pay customers harmed by their misconduct.  Unlike other licensed professionals brokers are not required to carry insurance and their firms may have surprisingly little cash or other assets available to satisfy claims.

A recent report by the Public Investors Arbitration Bar Association (PIABA) reveals that nearly $1 out of every $4 awarded to customers in arbitration went unpaid in 2013  The report describes the scope of the problem, provides context, and reviews and recommends solutions.  Brokers who fail to pay are barred from the industry, but the PIABA report suggests that regulators should not tolerate the status quo.  The problem has been around too long and hurts too many investors.  It concludes:

 “Allowing one in three awards to go unpaid is unconscionable.  FINRA’s cures:  barring from the industry those who fail to pay awards, and notifying claimants that they can pursue actions in court against former FINRA members, have failed to cure, or put a meaningful dent in, the problem.  Steps must therefore be taken to put forth a new division of FINRA to craft and administer a National Recovery Pool.”

Per PIABA, a small per-broker fee would quickly generate a large fund, which could be used to reimburse investors unable to collect on their awards.

FINRA has issued figures suggesting that the problem is not quite so grave.  According to a Wall Street Journal article, FINRA's figures put the prevalence of unpaid awards at about 15%.   FINRA continues to "study" the problem.  That is little solace to investors who obtain an award, often at significant legal expense and cost, but find that the award is noncollectable.

Expelled Stockbrokers vs. Disbarred Lawyers

Tuesday, March 1, 2016

Earlier this year, USA Today reported that FINRA suspended a record number of brokers in 2015, but the FINRA chairman, Richard Ketchum, responsible for the crackdown is retiring. 

A review of FINRA statistics, including data on investor protection, shows that FINRA got results more or less on par with 2014.  In 2015, 492 brokers were barred from Wall Street. That compares with 481 brokers barred in 2014, only eleven fewer.  In 2015 FINRA levied fines of $93.9 million.  That compares with $134 million in fines in 2014.  The numbers of firms expelled from 2010 to 2014 varied between 14 and 30.

Just to be fair to registered representatives -- and because there are bad apples in any profession -- I took a look at how many lawyers have been disbarred for the sake of comparison.

In 2011, according data reported in an American Bar Association (ABA) article, 652 lawyers were involuntarily disbarred nationwide, up from 503 in 2010. By comparison, 329 brokers were expelled in 2011 up from 288 brokers in 2010.  The Boston Globe reported that in 2011 there were about 1.22 million lawyers in the United States, which matches ABA data.  This compares with about 630,000 brokers in 2011, according to FINRA data

The conclusion from this very unscientific survey, looking at 2011 only, lawyers were suspended at about the same rate as stockbrokers! No further comment.