Statistics on Unpaid Customer Awards in FINRA Arbitration
Arbitration cases decided by award in the forum operated by FINRA represent a small subset of all cases closed involving customer disputes.1 For example, there were 2,457 arbitration cases involving customer disputes filed in 2016, but only 16 percent (389) of these cases closed by award. Another 71 percent (1,747) settled prior to award; 9 percent (212) were withdrawn; and 4 percent (109) closed by other means.
At times when an arbitration panel does award monetary damages to the claimant, the respondent may fail to pay the awarded damages. If a customer is not able to recover monetary damages awarded in the FINRA arbitration forum, that does not always mean that a customer did not receive any monetary payment in connection with the underlying dispute. In many cases that result in unpaid awards, a customer settles with one or more parties pre-award, but proceeds to obtain an award against other parties named in the case, who then fail to pay the award.
A claimant in the FINRA arbitration forum is in a similar position as if the claimant had brought an action in court and been awarded the same amount of damages. As in a court judgment, the responsibility to collect on an arbitration award lies with the claiming party. Similarly, as is the case with federal and state court systems and other arbitration forums, FINRA’s arbitration forum does not ensure payment of damages awarded. Arbitration claimants have access to the same collection tools as in a court judgment: if a respondent fails to pay an arbitration award, the claimant may take the award to court and have it converted to a judgment. The claimant may then attempt to collect on the judgment using the court’s collection procedures.
The issues summarized below are complex and discussed at greater length in FINRA’s Discussion Paper, FINRA Perspectives on Customer Recovery. The Paper reviews the data below, which are presented here for ease of reference and update, in the context of the history, process, and results of the FINRA arbitration forum, as well as the general issues of customer recovery across the financial services industry.
Consequences for FINRA Member Firms with an Unpaid Customer Arbitration Award
Although a customer claimant can always enforce an arbitration award in court, FINRA also has taken steps to mandate payment of customer arbitration awards by its members, to restrict—through suspension from the brokerage industry—those who do not pay awards, and to expand options available to customers with claims against respondents who are unlikely to be able to pay.
It is important to note that most unpaid customer arbitration awards are against firms or individuals whose FINRA registration has been terminated, suspended, canceled, or revoked, or who have been expelled from FINRA. These firms and individuals are generally referred to as “inactive,” and are no longer FINRA members or associated with a FINRA member, although they may continue to operate in another area of the financial services industry where FINRA registration is not required. Firms and individuals can become inactive prior to an arbitration claim being filed, during an arbitration proceeding or subsequent to an arbitration award, and this status can be caused by FINRA’s action—for example, as described below, when a firm or individual fails to pay an award—or the firm’s or individual’s own voluntary action. Some firms or individuals may remain active notwithstanding an unpaid award because they have a defense to non-payment, such as bankruptcy. As described below, FINRA is constrained in its ability to help enforce collection of an unpaid award against an inactive firm or individual.
Under FINRA rules, a respondent must pay a monetary award within 30 days of receipt, unless the respondent has a defense to non-payment.2 In order to incentivize member firms or associated persons to pay customer awards, and restrict those who do not, FINRA suspends from the brokerage industry any member firm or associated person who fails to pay an arbitration award. If a member firm or associated person fails to comply with an arbitration award or a settlement agreement related to an arbitration, FINRA staff notifies such firm or associated person in writing that the failure to comply within 21 days of service of the notice will result in a suspension of membership or a suspension from associating with any member.3
In each suspension action, FINRA creates a record that the firm or associated person failed to demonstrate payment of an arbitration award, and prevents the firm or associated person from being an active FINRA member or associating with a FINRA member until the award has been satisfied. Firms with unpaid awards cannot re-register without satisfying the award.4 Individuals cannot register as representatives of any brokerage firm without paying or discharging the outstanding award.
Expanded Options for Customers to Collect Payment
As noted above, most unpaid customer arbitration awards occur in cases where a member firm or associated person is inactive. Inactive respondents are less likely to be able to pay an award and FINRA is constrained in its ability to help enforce collection. FINRA therefore has adopted other rules and procedures that expand the options available to a customer when dealing with such respondents.
When a customer claimant first files an arbitration claim, FINRA staff alerts the customer if the respondent firm or associated person is inactive. FINRA also informs the customer that awards against such firms or associated persons have a much higher incidence of non-payment and that FINRA has limited disciplinary authority over inactive firms or associated persons that fail to pay arbitration awards. Thus, the customer knows before pursuing the claim in arbitration that collection of an award may be more difficult. In addition, upon learning that the respondent firm or associated person is inactive, a customer may determine to amend his or her claim to add other respondents from whom the customer may be able to collect should the claim go to award.
These considerations are discussed in greater detail on pages 13-15 of the Discussion Paper, FINRA Perspectives on Customer Recovery.
A customer is not required to use an arbitration forum when bringing a claim against a firm that is inactive.5 In these circumstances, the customer is able to evaluate the likelihood of collecting on an award and make an informed decision whether to proceed in arbitration, to file the claim in court, or to amend his or her claim, regardless of whether the customer signed a predispute arbitration agreement.6 Accordingly, claims against inactive firms proceed in arbitration only at the customer’s option.
Unpaid Customer Arbitration Awards Data
The following charts provide data regarding customer arbitration awards in which monetary damages were awarded for each of the last five years. The information in the charts is current as of the date indicated below and will be updated in accordance with subsequent developments and as additional years’ data becomes available.
Last Updated February 2018
Unpaid Customer Arbitration Awards by Number of Awards
|Year Award Issued||# Cases Closed||# Cases Settled||% Cases Settled||# Cases with Awards Issued||# Cases Awarded Damages||# Cases with Unpaid Awards||% Cases Awarded Damages that are Unpaid||% Cases Closed with Unpaid Awards||# Cases with Pending Judicial Motions to Vacate|
Unpaid Customer Arbitration Awards by Value of Awards
|Year Award Issued||Total Amount Awarded||Total Unpaid Award Amount||% Award Amount Unpaid||Award Amount Pending Judicial Motions to Vacate|
Distribution of Unpaid Customer Arbitration Awards by Value of Awards
|Year Award Issued||# Cases with Unpaid Awards||Total Unpaid Award Amount||Min. Award Amount Unpaid||Median Award Amount Unpaid||Max. Award Amount Unpaid||Mean Award Amount Unpaid|
Highest Unpaid Customer Arbitration Awards by Value of Awards
|Year Award Issued||# Cases with Unpaid Awards||Total Unpaid Award Amount||Total Amount of Top 3 Highest Unpaid Awards||Total Amount of Top 5 Highest Unpaid Awards|
Size of Firms with Unpaid Customer Arbitration Awards by Number of Registered Brokers
|Year Award Issued||Average Firm Size||Median Firm Size|
Unpaid Customer Arbitration Awards with Inactive Respondents7
|Year Award Issued||# Cases with Unpaid Awards||# Unpaid Awards in Which:||Total Unpaid Award Amount||Total Amount Unpaid in Which:|
|Firm(s) Inactive at the Time the Claim was Filed||Individual(s) Inactive at the Time the Claim was Filed||Firm(s) Inactive at the Time the Claim was Filed||Individual(s) Inactive at the Time the Claim was Filed|
The considerations related to inactive respondents in the FINRA arbitration forum are discussed on pages 13-15 of the Discussion Paper, FINRA Perspectives on Customer Recovery.
Unpaid Customer Arbitration Awards with Pre-Award Settlements8
|Year Award Issued||# Cases with Unpaid Awards||# Unpaid Awards in Which:||Total Unpaid Award Amount||Total Amount Unpaid in Which:|
|Firm(s) Settled with the Customer Pre-Award||Individual(s) Settled with the Customer Pre-Award||Firm(s) Settled with the Customer Pre-Award||Individual(s) Settled with the Customer Pre-Award|
The considerations related to pre-award settlements in the FINRA arbitration forum are discussed on pages 9-10 of the Discussion Paper, FINRA Perspectives on Customer Recovery.
Unpaid Customer Arbitration Awards in Cases That Were Uncontested
|Year Award Issued||# Cases with Unpaid Awards||Total Unpaid Award Amount||# Cases with Uncontested Unpaid Awards||Amount of Uncontested Unpaid Awards|
The considerations related to uncontested awards in the FINRA arbitration forum are discussed on pages 7-8 of the Discussion Paper, FINRA Perspectives on Customer Recovery.
Notes on Unpaid Customer Arbitration Awards Data
The information FINRA collects today regarding unpaid customer arbitration awards is focused on enabling FINRA to determine when to institute expedited suspension proceedings under FINRA Rule 9554 against a firm or individual who has not paid a customer arbitration award. FINRA’s approach to unpaid award data collection is explained in further detail below.
These data will be updated periodically, and may change over time due to subsequent developments.
Payment Plans and Post Award Settlements
Currently, FINRA does not track if an award subject to a payment plan has not been paid unless a party informs us. In addition, if the parties agree to a post-award settlement, FINRA does not track if the award has not been paid unless a party informs us. Accordingly, FINRA treats such awards as paid in full, unless a party to the award notifies FINRA that a payment has been missed or an award has not been paid in full. If FINRA is later notified that the parties have not complied with a payment plan or post award settlement, FINRA commences expedited suspension proceedings under FINRA Rule 9554 and will update the unpaid awards data to reflect the full amount of the award as an unpaid award.
Motions to Vacate
Under FINRA rules, arbitration awards are considered final and not subject to review or appeal through FINRA. However, parties have the right under federal and state law to challenge the award by filing a motion to vacate the arbitration award in a court of competent jurisdiction. The grounds for vacating an arbitration award are extremely limited, and motions to vacate are rarely successful. If a motion to vacate is successful, the underlying award is invalidated and there is no payment obligation. If a motion to vacate is denied, the award stands and the payment obligation is revived. While a motion to vacate is pending, the award payment obligation is stayed and the award is therefore not classified as unpaid.
The charts above reflect the total number of customer cases and the dollar amounts of pending judicial motions to vacate as of the date the charts were last updated. FINRA reviews the dispositions of motions to vacate and updates the numbers to reflect the final outcomes of the subject awards.
The “automatic stay” under the Bankruptcy Code generally stays any action to collect a debt owed by a person that has filed a bankruptcy petition (or become the subject of a liquidation under the Securities Investor Protection Act (SIPA)). However, in the unusual circumstance where a bankruptcy court determines an arbitration award not to be dischargeable in the bankruptcy (or SIPA liquidation), and the customer claimant notifies FINRA of this fact, FINRA will commence expedited suspension proceedings against the firm or individual under FINRA Rule 9554.
Creditors with claims allowed by the bankruptcy court generally are entitled to receive distributions or payments on their claims from the liquidation of the bankrupt person’s assets (or under a plan approved by the court in the case of a bankruptcy under Chapter 11 or 13 of the Bankruptcy Code). Although these payments may be considerably less than the amount of the claim (and may even be zero), they nevertheless generally discharge the claim. Customers with arbitration awards against a firm or associated person that has entered bankruptcy therefore may receive only a fraction of their award, or even nothing, when that award is discharged in bankruptcy. The discharged amount will be included in the unpaid awards data.
While Securities Investor Protection Corporation (SIPC) protects customers’ claims for funds and securities entrusted to their broker even if the broker is in bankruptcy, SIPC does not protect customers’ unpaid arbitration awards unless they are for the return of such funds or securities (e.g., claims for theft of such funds or securities or claims arising out of unauthorized trading).
1 While FINRA’s arbitration forum is used for both intra-industry and customer disputes, these data are limited to customer disputes.
2 See FINRA Rule 12904(j). An associated person or firm has four available defenses to FINRA disciplinary measures for non-payment in customer cases: (1) the firm or associated person paid the award in full; (2) the parties have agreed to installment payments or have otherwise settled the matter; (3) the firm or associated person has filed a timely motion to vacate or modify the award and such motion has not been denied; and (4) the firm or associated person has filed a petition in bankruptcy and the bankruptcy proceeding is pending or the award has been discharged by the bankruptcy court. See Notice to Members 00-55 (August 2000).
3 FINRA can institute suspension proceedings against formerly associated persons for failing to pay an award or settlement in a matter submitted for arbitration or mediation pursuant to FINRA rules for a period of two years after the entry of the award or settlement.
4 With respect to new member firms, in accordance with the standards for admission under the rules governing FINRA’s Membership Application Program, FINRA can presumptively deny a new membership application if the applicant or its associated persons are subject to an unpaid arbitration award. See NASD Rule 1014(a).
5 See FINRA Rule 12202. Typically, the inactive firm will not appear, resulting in the arbitrators basing their ruling on the customer’s presentation of the conduct and harm.
6 If the customer notifies FINRA in writing that he or she does not want to proceed against the inactive firm in FINRA’s forum, the staff deems the customer’s agreement to submit to arbitration rescinded and sends the customer a full refund of any filing fee remitted.
7 Because both a firm and an individual who was associated with the firm may be inactive at the time a claim is brought, figures for firms and individuals may overlap.
8 Because both a firm and an individual who was associated with the firm may have settled in the same case pre-award, figures for firms and individuals may overlap.