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Smaller Brokerage Firms Failing to Pay FINRA Arbitration Awards

By George C. Miller, Esq. of Shustak Reynolds & Partners, P.C. posted on Friday, September 23, 2016.

George C. Miller

George C. Miller


Location: San Diego, California
Phone: (619) 696-9500 (Ext. 105)
Direct: (619) 501-8270
Email[email protected]

In a concerning trend, Investment News recently reported that smaller brokerage firms are increasingly walking away from arbitration awards and shutting their doors. Many of those firms do not carry insurance and have little to no tangible assets to collect against, leaving damaged investors empty-handed, even after prevailing on their claims at arbitration.  

According to a 2013 study by the Financial Industry Regulatory Authority (FINRA), as many as 14% of arbitration awards against brokerage firms go unpaid.  And while many reputable broker-dealers carry insurance, some do not. Those with insurance often do not have enough to go around when significant problems arise. There currently is no industry rule requiring broker-dealers to carry insurance to cover arbitration awards. While FINRA has toyed with implementing such a rule in the past, no new rule has been proposed. A FINRA spokesperson claimed the rule would be too costly to implement and suggested it may put smaller firms out of business. That begs the question of whether a firm that cannot afford insurance should be permitted to manage substantial client money in the first place.  

Assuming an investor has an award against a viable firm, it is not all doom and gloom when it comes to collection. Unlike a court litigation, where winning the case is only half the battle (collecting a judgment can be more challenging than prevailing on the case in chief), FINRA awards must be paid within 30 days of issuance. With limited exception, if a firm (or individual advisor) fails to pay an award timely, FINRA will revoke their license and preclude them from continuing to work in the securities industry.  

Shustak Reynolds & Partners P.C.’s FINRA attorneys and financial services lawyers in San Diego, Irvine, Los Angeles, San Francisco and New York have extensive experience representing brokerage firms, RIA firms, high-net-worth investors in a variety of securities disputes, including FINRA arbitrations, petition proceedings to vacate or confirm arbitration awards, FINRA and SEC investigations and enforcement actions. Contact us today for a confidential consultation.  

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