Earlier posts highlighted a long-recognized problem in the securities industry: investors who've proven that they were harmed by bad actors all too often wind up recovering little or nothing even after winning a legal claim.
An analysis of arbitration awards a few years ago revealed that about 25%, nearly $1 out of every $4 awarded to customers in arbitration went unpaid. There are solutions to the problem, like requiring insurance (as is required to register an automobile), requiring that broker-dealers maintain higher minimum capital reserves, or establishing a fund that could be used to pay arbitration awards against broker-dealers who can't or won't pay, as described here. Have these or other solutions been implemented? No, although they remain under consideration.
And the problem remains prevalent. The industry faces a "fresh wave" of unpaid arbitration awards, according to reporting by Bruce Kelly in Investment News. He reports, "From 2013 to 2017, brokers and firms failed to pay $167 million in arbitration awards to customers that FINRA hearing panels had approved." A $1 million award made in Maine not long ago remains unpaid. That's quite a bit of money, especially considering that it represents awards obtained after a legal proceeding and the vast majority, in some instances, of investors' retirement savings.
This a a problem in need of a solution. At stake is not just the well-being of customers who have been defrauded and face dire personal financial and lifestyle consequences, or the injustice of leaving customers without any real-world remedy in all too many instances. The industry needs to weigh the risk of seriously undermining consumer confidence, which could have much broader implications for the health of financial markets.
News and commentary from the Financial Services attorneys at Preti Flaherty.
