PIABA President Michael Edmiston said the trade group for plaintiff attorneys supports the proposed rules “because they would allow the state regulators to suspend or expel a financial professional or firm if they fail to pay an arbitration award or otherwise attempt to avoid payment of any client or customer-initiated arbitration.”
PIABA has called for the establishment of a fund to pay stiffed investors twice before. “While the proposed rules are undoubtedly a positive step and important tool for regulators, PIABA repeats its longstanding call to NASAA and the securities industry to institute an Investor Recovery Fund: The most effective solution to address the serious unpaid arbitration issue,” Edmiston said.
While the rules may incentivize brokers and reps to carry errors and omissions insurance, the best protection for investor recovery is the establishment of a fund, he argued. Schwab instituted an E&O policy requirement on its 13,000 advisors, but only Oregon requires firms and advisors to carry such insurance, which is imperfect at best, Edmiston said.
While insurance will typically address standard negligence claims, PIABA members have found that policies are rife with exemptions for a variety of things common in securities disputes. For example, particular novel products, options, private placements, insurance products and fraud claims can be excluded from insurance coverage, he said.
E&O policy design can also be problematic, allowing defense counsel to be paid first and in full while the investor who wins their claim will not be paid, he added. “A repeat bad actor may quickly deplete a million-dollar coverage policy within a coverage period. ... While insurance coverage is desirable, its inherent limitations can lead to an uneven administration of justice and further undermine investors’ confidence in dispute resolution and the securities industry at large."