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FINRA considers creation of fund for unpaid arbitration awards

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FINRA's board of governors is privately debating the creation of a relief fund for unpaid arbitration awards, one of its board members confirmed.

"All I'm going to say is it's being worked on," Brigitte Madrian told Financial Planning. "When [FINRA CEO] Rick Ketchum says this is something we are looking into and are interested in, he wasn't just giving this lip service."

Such a fund – which Ketchum discussed on Capitol Hill earlier this year – would aim to solve the ongoing problem of investors who win awards from FINRA member firms and brokers, only to find it impossible to collect on those claims. A total $62 million in awards went unpaid in 2013, for example, the most recent year for which data is available.

During testimony on Capitol Hill in March, Ketchum came under withering questioning from Sen. Elizabeth Warren (D-Mass.) on a variety of subjects, including the persistent problem of unpaid awards.

The $62 million in unpaid awards in 2013 amounted to one in three that year, jilting investors who may have spent months or years seeking redress for their losses, according to a report by the Public Investors Arbitration Bar Association.

"That's not something that anybody wants," says Madrian, who is also a professor of public policy and corporate management at Harvard. "We can do better and we should do better."


Arbitration awards go unpaid mainly after brokerages and planners declare bankruptcy. Plaintiffs often are unable to collect from insolvent defendants, just as they are following rulings in court cases.

Yet since FINRA firms and brokers are regulated, the public expects they should be held to a higher standard, argues PIABA President Hugh Berkson, who wrote his organization's report about the issue.

It proposes that FINRA members pay dues annually into a designated pool, amounting to about $100 per broker, to help compensate jilted award winners.

"The logical underpinning for charging FINRA and/or its members to fund the pool is simple: The wrongdoing giving rise to the unpaid awards was the result of wrongful conduct of FINRA members," Berkson writes in the report.

The report lays out a blueprint by which such a pool could be created and maintained based on the average sum of unpaid claims the past five years. All of the money would be paid out annually.


The report acknowledges risks to such a fund, such as a massive fraud akin to Bernie Madoff that would overwhelm it. Even a fund that may fall short "is certainly better than what we have now, which is absolutely nothing," Berkson says.

The fund's existence is likely to increase the number of arbitration cases, Berkson predicts, since many securities lawyers refuse to represent fraud victims when there is no chance of collecting from bankrupt firms or brokers.

These issues are "something I thought long and hard about in writing the report," he says.


As Ketchum prepares to leave his position as CEO this month, to be succeeded by former SEC official Robert Cook, Berkson says he's glad to hear the regulator is looking to assist investors who were wronged but have no way of collecting remuneration despite prevailing in an arbitration.

"I'm hopeful that they actually reach the conclusion that we did that the problem is intolerable [and] that they need to take action," Berkson says.

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