Investor Recovery Fund Needed To Close Gap Made By Unpaid Arbitration Awards: Report

A group of arbitration attorneys warn that about one-third of all investor recovery awards against financial firms for investment losses caused by fraud or misconduct go unpaid, leading to calls for the industry to establish a fund to compensate investors.

In a report (PDF) released last week by the Public Investors Arbitration Bar Association (PIABA), which represents individual investors in claims presented against brokerage companies and investment firms, the group indicates that the high number of unpaid investor awards supports the need for a National Recovery Pool needs to track and enforce investor arbitration decisions.

PIABA found that about $62.1 million in damage awards issued by the Financial Industry Regulatory Authority (FINRA) went unpaid in 2013, which represents about 33%. In addition, the industry also did not pay nearly a quarter of all monetary awards issued by FINRA, which is the oversight body that arbitrates all disputes between investors and brokerage firms.

The findings came from an analysis of arbitration awards issued in 2013. According to the report, written by PIABA president Hugh D. Berkson, investigators had to go find each individual non-industry case because FINRA does not make the data available.

“Allowing one in three awards to go unpaid is unconscionable,” the report concludes. “FINRA’s cures: barring from the industry those who fail to pay awards, and notifying claimants that they can pursue actions in court against former FINRA members, have failed to cure, or put a meaningful dent in, the problem. Steps must therefore be taken to put forth a new division of FINRA to craft and administer a National Recovery Pool.”

In a press release describing the findings, Berkson said that the awards often involve underfunded or insolvent brokerages who did not maintain insurance and that have little capital, meaning there is often little investors can do to collect a significant award of damages caused by fraud or misconduct.

Berkson said FINRA’s decision to keep the data under wraps highlights the unfairness of the arbitration system, which PIABA says is weighted in favor of firms and brokerages and prevents investors from pursuing damages in court, often making it difficult for individual investors.

Three states, Indiana, Montana and North Dakota, have already enacted recovery pools, but the PIABA report says that the pools should be national in scope. The pool would pay out to investors who have won arbitration awards after other avenues of recovering the money from the original defendant failed.

The group calls for FINRA, it’s members, and individual investors to fund the pool, with the majority coming from FINRA and its members.

FINRA is a non-governmental agency that acts as a self-regulatory agency for investment firms. It was created in July 2007, as a successor to the National Association of Securities Dealers, handling all disputes between investors and stockbrokers or other financial firms. FINRA arbitrators resolve stock broker fraud claims that can include charges of breach of contract, breach of fiduciary duty, negligence, misrepresentation, unauthorized trading and other claims that investments were improperly handled.