If the goal is to protect people from suffering devastating injuries, would it be best to install seatbelts before the car accident, or after? Retirement savers and other individual investors today have no meaningful protection against unscrupulous stockbrokers, investment advisors, and firms who handle hundreds of millions of customer dollars but conduct business without sufficient capital reserves or liability insurance. Wall Street and the securities industry as a whole encourages Americans to trust their financial professional with their retirement savings. But few investors understand that the securities industry does not mandate protections to ensure investors can be made whole after successfully proving a claim for recoverable losses against their financial advisor. American investors have enjoyed the benefits of a stock market that has risen to all-time highs without a meaningful correction for the last decade, and a national economy that has flourished under the most adverse of circumstances. Despite these favorable dynamics, unpaid arbitration awards are still hovering at more than 24% of all dollars awarded to investors in arbitration administered through the Financial Industry Regulatory Authority ("FINRA"). Nearly 30% of all FINRA awards in customer claimants' favor in 2020 went unpaid.Many investors do not discover the misconduct in their investment accounts until there is a market correction. For these investors, most of whom rely on their own savings - often in a retirement plan - rather than a pension to fund their retirements, a meaningful market downturn will likely reveal unprecedented harm to America's retirees and those on the verge of retirement. Since the industry has shown no interest in taking steps to ensure it maintains the same sort of financial responsibility it preaches to its customers, it is time for regulators and legislators to mandate seat belts, in the form of a national investor recovery pool.The problem of unpaid securities arbitration awards is not a new one. Twenty-one years ago, the U.S. General Accounting Office ("GAO") issued a report on unpaid awards. In its survey of investors who received arbitration awards during 1998, the GAO estimated 49% of the awards went unpaid, an additional 12% were only partially paid, and nearly 80% of the total $161 million awarded to investor claimants that year went unpaid While FINRA now publishes some recent data on unpaid award statistics, and has implemented or proposed certain rule changes to try to curb abusive industry practices, neither FINRA nor state and federal regulators have directly addressed the fundamental lack of meaningful recovery protection. The problem of unpaid arbitration awards is only growing, thanks in large part to the increasing role of investment advisers, and their common use of commercial and for-profit arbitration forums other than FINRA Dispute Resolution for which there is no public reporting and little regulatory accountability. This report contains PIABA's third analysis of the problem of unpaid arbitration awards, and a renewed call for substantive remedial measures to protect retirement savers and all other individual investors.
[I] urge FINRA to create a Wall Street Anti-Fraud Fund, a proposal that I have made for some two decades and which continues to fall on deaf ears. Wall Street should have an "Anti-Fraud Fund" for the benefit of defrauded public customers who have proven the liability of a FINRA member firm but are unable to fully collect their compensatory damages, costs, and fees because of that firm's insolvency. I do not favor extending such a guaranty into punitive damages or "unreasonable" attorneys' fee and other charges. Fervently, I believe that the securities industry has the wherewithal and the moral/ethical obligation to put its money where its dirty mouth has been. There may be legitimate debate as to how best to fund the anti-fraud fund, but that only goes to the mechanics of doing the right thing. . . .
End Mandatory Customer and Industry Arbitration
- Permit voluntary arbitration
- Eliminate industry-sponsored arbitration forums as sole optionCreate a Fund for Full Payment to Defrauded Investors
- Impose fee on all trades
- Impose annual renewal fee on firms and financial services providers
- Initially allocate all regulatory fines to this Fund (until fully funded)
- Require proof of prevailing decision in court or arbitration
- Limit fund compensation to compensatory damages and reasonable fees/expenses
- Require proof of insolvency of respondent or defendant
Implement Bounty Program for Whistleblowers and Tipsters
- Model after Qui Tam or False Claims Acts
- Offer a percentage (sliding scale of between 10% to 33%) of funds recovered
I urge FINRA to reinvent itself as a "private sector regulatory organization" ("PSRO") and to expand and enhance its mission from one for the broker-dealer industry towards one for the larger private sector served by the financial services community. In furtherance of that change, the PSRO would serve in a holding-company role that oversees each of three regulatory divisions dedicated to Small member firms (smallest 25% of broker-dealers), Mid-sized member firms (50% of broker-dealers measured from midpoint), and Large member firms (largest 25% of broker-dealers). Pursuant to that restructuring, each division would draft a rulebook responsive to the unique needs of its constituency. The PSRO would fully enfranchise associated persons, and provide for the proportionate representation for such stakeholders as public customers, issuers, and regulators. Without question, a PSRO Board seat should be set aside for an investors' advocacy group such as PIABA.As part of reimagining the SRO into a more expansive PSRO, all industry registration and continuing education should be undertaken directly by an applicant through the PSRO holding company and not through the member firms. FINRA should establish an Anti-Fraud Fund whereby all defrauded public customers would obtain restitution in the event that member firms or associated persons fail to timely honor any awards for compensatory damages, costs, and fees. Finally, I would abolish mandatory arbitration for customers and associated persons.
The BrokeAndBroker.com Blog's publisher, Bill Singer, has long advocated for the creation of an Anti-Fraud Fund on Wall Street to serve as a back-stop for defrauded public investors who obtain awards of compensatory damages against insolvent industry firms and registered representatives. Bill does not favor extending such a guaranty into punitive damages or "unreasonable" attorneys' fee and other charges, but he does believe that the securities industry has the wherewithal and the moral/ethical obligation to put its money where its dirty mouth has been. While there may be legitimate debate as to how best to fund the anti-fraud fund, that only goes to the mechanics of doing the right thing. In the case of the Financial Industry Regulatory Authority, we have a self-regulatory-organization that needs to get behind this pro-consumer effort and with haste. . . . FINRA's regulatory mandate is set out in FINRA Rule 2010: Standards of Commercial Honor and Principles of Trade: "A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade." Today's BrokeAndBroker.com Blog asks whether the self-regulatory-organization itself will observe high standards of commercial honor and just and equitable principles of trade when it comes to seeing that justice is done for defrauded public investors.