The Financial Industry Regulatory Authority Inc. (FINRA) announced new rules that will tighten the self-regulatory organization’s membership application process to curb individual brokers’ and brokerage firms’ ability to sidestep paying arbitration awards.
These rules are approved by the Securities and Exchange Commission (SEC) and will be effective starting September 14, 2020. As a result, FINRA will be able to refuse a new membership to a broker or firm if the applicant has ongoing arbitration claims where there is a concern about payment of potential awards/settlements.
New Rules Force Firms to Pay Arbitration Awards to Maintain Membership
The new rules also force firms with large unpaid arbitration awards to apply for continuing membership and undergo heightened examination if they attempt to close down, shift assets, management, or owners to another firm.
Unpaid arbitration awards have been a continuous problem in the brokerage industry as over a quarter of arbitration awards went unpaid between 2012 and 2016. Going through the time and stress of an arbitration proceeding provides little, if any, solace to investors if a successful arbitration award goes unpaid.
New Rules Also Under Scrutiny from Legal Community
While we believe the new rules are a step in the right direction, we believe that FINRA needs to do a better job of policing the business activities of its member brokerage firms, especially the activities of the smaller, undercapitalized, and often uninsured brokerage firms. Indeed, it is the improper business practices and resulting customer investment losses, that ultimately lead to the unpaid and uncollectible arbitration awards.
We believe that some form of fund should be created to be used to compensate investment fraud victims whose arbitration awards go unpaid by the offending brokerage firms. Such a fund could be funded from brokerage firm membership fees or from FINRA regulatory fines levied upon brokers and brokerage firms. In the alternative, or even in addition, FINRA could require brokerage firms to carry certain amounts of insurance coverage or could require brokerage firms to maintain much higher capital than the current, miniscule capital requirements. While some argue that such measures could make it too expensive for many brokerage firms to remain in business, others respond that brokerage firms that cannot afford to implement such investor protections should not be permitted to remain in business.
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