FINRA publishes names of brokers with unpaid arbitration awards. Is it enough?
FINRA is making it easier to identify the firms and brokers who owe clients outstanding arbitration awards — but it may be downplaying the extent of the problem.
The industry regulator has published the names of parties responsible for unpaid arbitration awards in a single page on its site, explaining the move as a bid to "provide greater transparency" about delinquent brokers "and to make this information more readily accessible to investors."
FINRA's list includes individuals and firms that have been suspended from practicing owing to the unpaid awards, as well as those that have cited bankruptcy as a defense for not paying.
Researchers from top business schools studied arbitrator selection, as shown in nearly 9,000 cases filed by clients over a 27-year span.October 24
The regulator moved to eliminate a $400 fee for “explained decisions.”March 22
The regulator points out that the volume of cases that result in unpaid awards represents only a small segment — 2% — of all cases involving client disputes that move through its arbitration process. Sixty-nine percent of cases result in a settlement between the broker and the aggrieved client.
But that's shading the issue to minimize the scope of the problem, argues Ross Intelisano, a partner at the New York law firm Rich, Intelisano & Katz.
"If FINRA means 2% of total cases filed end in unpaid awards, that is not really that relevant," Intelisano says.
Of the cases that resulted in damages awarded in 2016, 27% went unpaid, according to FINRA. In each of the past five years dating from 2016, the percentage of cases with unpaid damages ranged from 25% to 30% of all cases in which damages were awarded. FINRA reports that from 2012 to 2016, $197 million in awards went unpaid.
Still, that only illustrates part of the overall picture of investor losses at the hands of unscrupulous brokers.
"These stats do not take into account the many cases that are not filed due to collectability problems of potential respondents," Intelisano says.
Attorneys working with investors will routinely evaluate the prospects of collecting an award from a firm before initiating an arbitration proceeding. Some have argued that the number of cases brought to arbitration are dwarfed by those that never see the light of day because the odds of collecting an award are so slim.
Moreover, Intelisano argues that cutting off the reporting date at 2012 excludes the period when investors suffered the greatest losses at the hands of brokers engaged in risky practices that went south during the financial crisis.
"The time period does not include 2008-2010 when many broker dealers and [registered representatives] failed post-market collapse," he says. "Counsel for investors learned the hard way in the years prior to 2012 to not file claims against potentially failing firms."
FINRA has faced mounting pressure on the issue of unpaid arbitration awards. In a March proposal endorsed by many investor advocates, Sen. Elizabeth Warren introduced legislation that would compel FINRA to set up a fund to compensate investors whose arbitration awards would otherwise go unpaid.
A spokeswoman for FINRA declined to comment beyond the publication of the list. In the past, the group has said that it is continuing to explore ways to address the issue of unpaid arbitration awards.