Such a fund could also encourage arbitration panelists to award damages to investors “whether justified or not, out of a sense of wanting to make the investor whole and knowing that the firm or financial advisor will not have to pay out of pocket,” Traxler warned.
“We feel these potential and likely drawbacks far outweigh the good intentions of the bill to ensure no arbitration award go unpaid, particularly in light of the Finra data that indicates only 2% of all claims filed … go unpaid,” she said.
Traxler said that requiring reps to carry errors and omissions insurance, another possible solution Finra has discussed, would be an error and hit small firms hard while not covering situations that result in unpaid arbitrations such as fraud.
“We heard from E&O carriers that they are unlikely to underwrite this type of insurance as it could encourage reckless behavior,” Traxler said.
Finra has also suggested that increasing net capital requirements (currently $5,000) on firms may help to dissuade them from engaging in activity like not paying arbitration awards, which would result in the loss of their license.
Given that the average unpaid arbitration award is $200,000 “it would make sense, then, that the net capital requirement be raised to at least $200,000. This is simply not a viable solution and would result in putting numerous small firms out of business,” Traxler added.
The Public Investors Arbitration Bar Association (PIABA) has suggested that Finra use the fine money it collects to make good on investors’ unpaid arbitration awards.
Last week, Finra turned up the heat on firms and brokers that fail to pay arbitration awards to customers, publishing a list of those in arrears.
Sen. Warren and the new Democrat majority in the House of Representatives are likely to revisit the issue of unpaid Finra arbitration awards in hearings and legislation over the next two years.