The North American Securities Administrators Association announced late Tuesday that it was releasing for public comment a new proposed rule that would give state securities regulators the authority to punish and even take the license of any financial professional or firm that has unpaid arbitration awards or regulatory fines.

If approved, the model rule would make it more difficult for state-registered securities scofflaws, namely broker-dealers, agents, investment advisors and investment advisor reps, to continue to operate if they haven’t paid awards or fines. 

Nearly one out of four dollars awarded to investors in 2020 went unpaid, even as many brokerage firms’ profits grew to record levels, according to a report published September 29 by the Public Investors Advocate Bar Association. The group also found that unpaid arbitration awards cost investors more than $5 million in 2020 and $19 million in 2019.

The NASAA proposal “seeks comment on a model rule that would require financial professionals to meet their regulatory obligations, including payment of arbitration awards, and sanction those applicants or registrants who fail to fulfill those obligations,” said Melanie Senter Lubin, president of the NASAA.

The proposed rule would make it an “unethical business practice” for any state licensed entity to fail to pay an arbitration award or fine entered against the person.

It would give state regulators the ability to bring enforcement action against licensed entities if they:

• Fail to satisfy an arbitration award resulting from a client or customer-initiated arbitration;
• Attempt to avoid payment of any client or customer-initiated arbitration; or,
• Fail to satisfy the terms of any order resulting from a regulatory action taken against the registrant.

The proposed rule comes one week after the Public Investors Advocate Bar Association called on Congress, the Securities and Exchange Commission or both to step in and require the Financial Industry Regulatory Authority to create a national investor recovery pool to make investors with unpaid arbitration awards whole—as long as they have exhausted reasonable collection efforts. This is the second time the bar association has called for this remedy since 2016.

Financial Advisor magazine asked the NASAA if it supported the push or the establishment of a Finra pool for unpaid arbitration awards, but did not immediately hear back.