The brokerage industry continues to oppose the creation of any kind of firm-funded investor pool to offset unpaid investor arbitration awards—a bedeviling problem that impacts one out of three investors who take their grievances against brokers to arbitration.

The debate over how to pay investors who are stiffed by their brokers dominated a Securities and Exchange Commission Investor Advisory Committee meeting today. Any solution should be designed to make more investors who win in arbitration against bad brokers whole, proponents of reform say. The average unpaid arbitration award is currently $200,000, according to the Financial Industry Regulatory Authority.

How much have investors gotten stiffed by brokers, who can simply fold up shop or declare bankruptcy to avoid paying arbitration awards? Richard Berry, Finra’s executive vice president and director of dispute resolution, said about 2% of awards made by Finra arbitrators between 2012 and 2016 have gone unpaid, translating to about $14 million out of $119 million in unpaid arbitration awards in 2016.

“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,” Berry said.

While legislation from Sen. Elizabeth Warren (D., Mass.) and several Finra suggestions would require the industry to foot the bill for unpaid arbitration, Financial Services Institute Senior Vice President Robin Traxler said that such solutions would have “serious unintended consequences” for honest brokers. A better solution would be to ban derelict brokers and “make it impossible for them to continue working in any aspect of the financial industry,” Traxler said.

Currently, a bad broker who loses his or her Finra registration because of unpaid arbitration “can simply become an investment advisor representative or go into insurance and continue working with investors,” she told the room full of policy analysts, regulators and attorneys at the SEC’s Washington, D.C., headquarters.

Traxler also supported expanding the definition of “statutory disqualification” to include control persons of firms with unpaid arbitrations, a solution that Finra has put forth. This would mean that anyone at a firm with “control,” including founders, executives and supervisors, would be on the hook for unpaid arbitration or risk losing their Finra registrations.

“But disqualification from Finra is just a start to what needs to result in full disqualification from working in any capacity, in any aspect of the financial services industry,” said Traxler, who suggested that effective regulatory coordination would make it easier for the SEC and state insurance and securities regulators to efficiently reject registrations for individuals who have been statutorily disqualified by Finra for failing to pay an award.

“We feel that the potential consequences to the bad actor are a truly significant deterrent to engaging in reckless or fraudulent behavior to begin with,” Traxler said.

FSI opposes the Warren bill, which directs Finra to create a relief fund to provide investors with the full value of their unpaid arbitration awards. “First we believe the mere existence of the fund would encourage bad actors to act recklessly, knowing they can defraud investors, but not have to pay the consequences beyond losing their Finra registration,” Traxler said.

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.