Executive Vice President, Dispute Resolution
Statement Before the SEC Investor Advisory Committee
Chairman Clayton, Commissioners, and Members of the Committee, thank you for inviting me to appear before you today to discuss the important issue of customer recovery in the financial services industry, including the issue of unpaid arbitration awards. For purposes of today’s discussion, my remarks are focused on unpaid awards in customer arbitration cases.
FINRA is fully committed to reducing the incidence of unpaid awards and judgments in the financial services industry. We welcome the opportunity to explore the advantages and disadvantages of potential ways to do so with this Committee.
The challenge of unpaid awards and judgments is not unique to the broker-dealer industry. They happen in the investment adviser space, in the broader financial services sector, and in all industries. These unpaid judgments and awards happen in federal court, state court, and in various arbitration forums.
Addressing these issues in the financial services industry requires a constructive dialogue among policymakers and other stakeholders. We have taken steps to encourage that dialogue by releasing a detailed Discussion Paper on customer recovery earlier this year. Since then we have met with investor advocates, industry representatives, state regulators and others. SEC staff have also participated. These meetings have helped us understand various concerns and perspectives, and given us insights on how we might move forward together. This Paper has been shared with the Committee, and we have hard copies available today for others who may be interested.
Today, I want to give you a brief overview of the arbitration forum that FINRA operates, discuss the issue of unpaid customer awards in the FINRA forum, and outline the steps we have taken to address them in the FINRA forum.
FINRA’s Arbitration Forum
Let me start with the arbitration forum itself. Most broker-dealers and many investment advisers require customers opening accounts to agree to arbitrate disputes. It’s important to note that FINRA rules do not require broker-dealers or their customers to enter into these agreements. Those agreements have been standard among brokerage firms since a 1987 Supreme Court decision upholding their enforceability. While referred to as the FINRA Arbitration Forum, it’s important to clarify that FINRA’s primary role is to administer cases - FINRA does not have any input into the outcome of arbitrations.
FINRA’s arbitration forum has protections and features that benefit investors and are not available in other venues.
- The SEC oversees the forum and approves its rules, which requires a determination that they are in the public interest;
- Investors are charged low arbitration fees, with 85 percent of the cost of the arbitration forum being borne by the industry;
- The forum offers parties the option of a panel composed of all public arbitrators who have no ties to the securities industry; and
- The forum rules provide for strict limits on the ability to bring motions to dismiss, which allow investors to be fully heard.
Unpaid Arbitration Awards at the FINRA Forum
Now, let me turn to the issue of unpaid customer arbitration awards.
Unpaid awards represent about 2% of the nearly 13,000 customer cases closed between 2012 and 2016. The vast majority of customer cases close by settlement - not award. This means that most arbitration cases will be resolved without the need for an award. However, when we focus more closely on the smaller subset of cases in which the arbitrators award damages to the customer, we note that about a third of these awards go unpaid.
FINRA has provided greater transparency for investors about a broker’s arbitration history. And – unlike any other arbitration forums of which we are aware – FINRA provides data on unpaid customer awards for the past five years on its website, including a list of those responsible for the unpaid awards.
FINRA has taken numerous steps to address unpaid awards. For example, FINRA has implemented a series of regulatory measures to identify and remove bad actors from the broker-dealer industry through enforcement actions, examinations and rulemaking. We are continuing to identify additional steps that we can take in this area.
We also take strong action against those that do not pay awards. FINRA suspends individuals and firms from the broker-dealer industry for non-payment of awards. However, I am not aware of any federal provision that prevents those suspended for non-payment from operating in other financial services industries.
Most recently, we have proposed a series of rules to further address unpaid awards, including rules to prevent parties from avoiding payment of awards through asset transfers.
Other Approaches to Further Address Customer Recovery
FINRA is committed to working collaboratively to further address unpaid awards. Our Discussion Paper identified additional approaches that raise broader policy issues, or that require SEC rulemaking or federal legislation. These approaches include:
- Rulemaking by the SEC to require firms to raise or maintain additional capital;
- Amendments to the SEC’s Form BD to require disclosure regarding unpaid awards by firms;
- Legislation to amend the Exchange Act statutory disqualification definition to enable FINRA to deny registration or membership to a broader group of brokers with unpaid awards;
- Legislation to amend the Bankruptcy Code so that arbitration awards cannot be discharged in bankruptcy as is currently possible;
- Legislation to expand SIPC coverage to include unpaid customer arbitration awards;
- Legislation or rulemaking to create a second brokerage industry fund, separate from SIPC; and
- Legislation or rulemaking to require brokerage firms to carry insurance to cover unpaid awards.
We recognize that each of these approaches involves important tradeoffs and policy choices that would require further consideration and analysis by the SEC or Congress. But, we think they are worth exploring further – along with any additional options that might be identified by others – as we continue our dialogue and consider potential courses of action.
FINRA’s mission is investor protection and market integrity, and we are committed to addressing unpaid awards in all forums in which securities disputes are decided. Finding solutions to this complex problem will require collaboration from all of us working together. And it’s an effort we must tackle because it speaks to what matters most: the protection of investors. We commend the Committee for addressing this issue and we look forward to working together to find solutions.