FINRA is considering adding a requirement that its firms carry arbitration insurance. The insurance would cover arbitration award payments to investors, protecting investors in the event that a firm finds itself unable to pay.
The arbitration process in its current form can cause problems for investors looking to recoup losses from firms that either are not intent on paying or are simply unable to pay due to low capitalization.
Arkansas securities commissioner Heath Abshure summed up the predicament: "Regulators wait until customers get fleeced to discover the money isn't there to pay them."
The new rule looks to fix the problem. According to FINRA Executive Vice President Susan Axelrod, the "errors and omissions" insurance would cover payment of awards to investors, even if the brokerage firm ordered to pay goes out of business.
FINRA statistics show that $51 million of arbitration awards granted in 2011 are still unpaid. Similar figures in the tens of millions of dollars have gone unpaid in 2009 and 2010, as well. With over 940 firms reporting net capital of under $50,000, just one arbitration award can potentially put the firm out of business.
For instance, one such firm—Meadowbrook Securities LLC, formerly Investlinc Securities LLC—closed in 2011 because the firm "lacked sufficient assets to pay the penalties being demanded by FINRA" for selling securities without proper due diligence.
FINRA barred Meadowbrook owner and chief executive Leroy Paris, fining him $10,000, while a FINRA arbitration panel ordered Meadowbrook LLC to pay investors $7 million, including $4.5 in punitive damages. Meanwhile, Meadowbrook reported net capital of just $6,563 in 2010, including $3,622 in cash—far short of the $7 million award being ordered.
For investors, the move requiring arbitration insurance would ensure the payment of awards for various degrees of misconduct including Meadowbrook's alleged lack of adequate due diligence: instead of a firm like Meadowbrook simply shutting down without paying, the insurance would take over and deliver.
If you have invested with a broker or firm whose has engaged in misconduct that has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.
News: FINRA to Consider Requiring Brokerages to Carry Arbitration Insurance (The Wall Street Journal)