How FINRA’s Handling the Problem of Unpaid Securities Arbitration Awards

Millions of dollars in awards go unpaid by defunct brokerage firms, boiler rooms, and unscrupulous brokers—what is FINRA doing to address this growing issue?

A recent report from the Public Investors Arbitration Bar Association (PIABA) says that 75 awards (approximately one third of all money awarded to clients in FINRA arbitration) during the year 2013 went unpaid.

Unlike many other types of business, brokers and financial advisors are not required to carry insurance, meaning there isn’t another source of assets to pay client awards if the firm’s assets dry up. While most large firms pay arbitration awards as quickly as possible in order to maintain their reputation and avoid further legal action, many smaller firms can’t or don’t pay many of their awards.

Just how much is going unpaid?

The PIABA report on unpaid arbitration awards discovered that awards totaling $62.1 million went unpaid in 2013. Another $213 million from the years 2009-14 (or 13% of the money awarded through this time period) also remains unpaid.

What is FINRA doing about the problem?

Brokers and firms who fail to pay awards can be barred from the securities industry for a number of years, or even permanently. However, FINRA has indicated it intends to investigate other potential remedies.

FINRA notifies claimants that they can pursue actions in court against former FINRA members, but post-arbitration court cases have failed to provide financial relief for many people whose arbitration awards remain unpaid.

In some cases, many claimants are already emotionally and financially exhausted from the arbitration process and would rather not pursue further legal action incurring additional expenses they may not recover. In other cases, when claimants sue and win judgments against former FINRA members who haven’t paid their awards, the firms or brokers have no assets to provide—perhaps the same reason they failed to pay the award in the first place.

What should FINRA do about the problem?

PIABA suggests that each FINRA member should pay a small annual fee to create a “national recovery pool,” or a large fund that could be used to reimburse investors whose FINRA awards are not paid.

Reports suggest that FINRA is financially equipped to do this; FINRA brought in $120 million in profits in 2014 alone, $20 million of which was returned to member firms. Therefore, even if FINRA did not impose additional fees on brokerage firms, FINRA’s profits could be used to help pay unpaid awards.

In fact, if FINRA’s 2014 profits were used to pay unpaid arbitration awards, they would satisfy over half of the more than $200 million of unpaid awards from 2009-14. While there is no current evidence that FINRA is planning to do this, further reports and recommendations may influence them in the coming years.

Unpaid securities arbitration awards are a big (and growing) problem for FINRA. After going through a year-long arbitration process, the last thing a claimant should have to worry about is whether their award is going to get paid.

While FINRA takes some measures to discourage unpaid awards, it’s not enough to stem the tide of firms and brokers who simply can’t or won’t pay. This means that it’s more important than ever to have an experienced securities arbitration attorney on your side during a FINRA Dispute Resolution, as your legal journey to recover lost funds may not end with FINRA’s arbitration process.

If you think you’ve been defrauded by a broker or financial advisor, contact Silver Law Group today for a free consultation.