FINRA did not create a recovery pool for "terribly harmed" investors with unpaid arbitration awards at its board meeting this week, despite raising expectations last year that it might do so.
Instead the self-regulator granted investors, in limited cases, the option of taking their dispute to a court even if they signed mandatory arbitration clauses with their advisers or their firms.
In a message about the board meeting this week, FINRA CEO Robert Cook made no mention of creating a fund.
"It's extraordinarily disappointing," says Andrew Stoltmann, executive vice president of the Public Investors Arbitration Bar Association whose members represent investors against FINRA-regulated brokers and their firms.
"Everyone waited a year and a half to see what solution FINRA was going to come up with and they ended up putting a Band-Aid on a massive bullet wound."
In a statement, the regulator called unpaid arbitration awards "a priority."
"We have devoted significant attention to this issue for some months now," it said. "We are continuing to develop additional proposals related to unpaid arbitration awards that will be brought to the board in coming months, so we anticipate there is more to come in this area."
FINRA did not indicate whether a recovery pool might be a part of those future proposals.
INVESTORS STUCK WITH LOSSES
Every year about a third of all such FINRA awards to clients go unpaid, totaling about $60 million, PIABA found in a study published last year.
The decision means that investors like former General Motors janitor Willie Cabbil will continue to be out of luck.
By running his practice like a Ponzi scheme, Cabbil's former adviser, Robert Gist of the now defunct Resource Horizons Group in Marietta, Georgia, defrauded the Alabama preacher of $340,000 in retirement savings in 2011, FINRA arbitrators found.
After going through a protracted FINRA arbitration fight, arbitrators awarded Cabbil $300,000. "I was ecstatic to have finally got my life back," Cabbil recalled last year.
However, after FINRA shut down Resource Horizons, Cabbil saw none of that money. "It breaks my heart," he said.
Gist could not be reached for comment.
Last year, under intensive questioning from Sen. Elizabeth Warren (D-Mass.) on the Hill, FINRA's then-CEO Rick Ketchum acknowledged that the problem is a serious one.
"There should be a fund to try to at least address the small investors that are terribly harmed," Ketchum told Warren. "Something should be done about it."
Ketchum "wasn't just giving this lip service," Brigitte Madrian, a FINRA board member told Financial Planning last year, adding that the regulator was working on the problem.
"We can do better and we should do better," she added.
2 'EASY SOLUTIONS'
However, when push came to shove this week, FINRA offered investors little in the way of progress, Stoltmann says, referring to the new option investors have to take their cases to court.
They may only do so, FINRA decided, in instances where their brokers or their brokers' firms have gone or are going out of business.
Taking a defendant with no assets to court is often a losing proposition.
"This literally does absolutely nothing to protect investors," Stoltmann says. "All it does is it offloads these cases from FINRA's dockets into the courts."
Stoltmann reiterated two "easy solutions" that PIABA had suggested in its study for addressing the problem. He says FINRA could have decided to impose a $100 annual fee on the 600,000 brokers nationwide to fund a recovery pool -- "and you would completely wipe out the problem." Or it might have allocated some of the tens of millions of dollars FINRA refunds to its members every year for the same purpose.
PIABA members have been lobbying members of Congress for years about this issue and, in the wake of FINRA's inaction, will continue to do so, Stoltmann says.
"FINRA is unwilling to rectify this problem," he adds. "At this point there's no question that, if this problem is going to be solved, it's going to have to be a legislative solution."
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