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The Good Guys Shouldn’t Have to Pay for Cheating Brokers, Witness Implores Senate

By Rita Raagas De Ramos March 18, 2019

The U.S. Chamber of Commerce believes broker-dealers shouldn’t be ordered to pay for a Finra fund for unpaid arbitration awards – whether through higher membership fees, fines or other means – because it would do more harm than good.

“We don’t want a situation where good actors are subsidizing bad actors,” insisted Thomas Quaadman, Washington, D.C.-based executive vice president for the Center of Capital Markets Competitiveness of the U.S. Chamber of Commerce.

Quaadman made the remarks when he testified last month before a Senate Committee on Banking, Housing, and Urban Affairs hearing where various pending legislative proposals were discussed.

Several potential solutions have been put forward to solve the problem of unpaid arbitration awards in Finra’s independent arbitration and mediation forum.

These include the proposed Senate Bill 2499 from Sen. Elizabeth Warren (D-Mass.), the Compensation for Cheated Investors Act, which would require Finra to set up a relief fund for unpaid awards funded by fines.

Others include a proposal from Finra for a relief fund that would be funded by additional fees charged to member firms or individuals or by dipping into an existing brokerage industry fund; mandated insurance coverage for member firms; and increased net capital requirements.

Unpaid awards made up an average of 2% of the 12,306 customer cases closed from 2013 to 2017, according to Finra data.

However, when looking just at the smaller subset of cases where arbitrators awarded damages to customers, an average of around 28% of the awards were unpaid in that five-year period.

In dollar terms, $167 million out of the $653 million in customer arbitration awards were unpaid in that five-year period, or around 26% of the total.

The U.S. Chamber of Commerce is “concerned” that Warren’s pending bill “misses the mark and will actually do more harm than good for investors,” according to Quaadman.

Quaadman noted in his testimony that the pending bill would effectively create an “open-ended” Finra Relief Fund.

He said the legislation would effectively let Finra tax firms that have done nothing wrong to pay out arbitration awards that have been awarded due to the activities of bad actors.

“More troubling, the legislation would empower bad actors by ensuring them there is a backstop in place – paid for by somebody else – to compensate investors they have cheated,” Quaadman said.

Quaadman believes the Securities Investor Protection Corporation should be used to cover any unpaid arbitration awards.

Besides, Quaadman said Finra already has “regulatory mechanisms” that should ensure customer claimants’ arbitration awards don’t go unpaid.

For example, Quaddman noted that Finra’s Customer Code states that unless a broker-dealer firm has a bona fide reason for non-payment of arbitration awards, the firm must pay the award within 30 days.

“Firms that do not pay within 30 days risk being penalized or suspended by Finra,” according to Quaadman.

Indeed, Finra has an expedited suspension procedure for broker-dealer firms or registered individuals who do not pay arbitration awards.

Senator Elizabeth Warren

If claimants – whether customers or Finra members – haven’t been paid within 30 days of being granted an arbitration award, they can request the expedited suspension process from Finra. After that request is filed, Finra then sends the derelict parties a letter informing them they have 21 days to do one of the following: pay the award; formulate a payment plan and get the claimants to agree to the plan; file for bankruptcy; or – for Finra members – request a hearing from the Office of Hearing Officers to argue an inability to pay.

Meanwhile, Richard Berry, New York-based director of Finra’s Office of Dispute Resolution, which administers the self-regulator’s independent arbitration and mediation forum, has said the unpaid arbitration awards are a complex problem with many potential solutions that also have potential ramifications.