Trouble With a Broker? Don’t Assume a Payout Is Coming

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If you believe your broker or brokerage firm has harmed you financially, don’t automatically expect to be compensated — even if you are granted an arbitration award, according to a new report from a bar association whose members represent claimants.

Around 30% of arbitration awards from rulings by the Financial Industry Regulatory Authority (FINRA) were unpaid in 2020, the Public Investors Advocate Bar Association (PIABA) says.

FINRA is an independent organization that oversees brokers and brokerage firms. Customers who feel their brokers have engaged in financially damaging conduct can turn to the organization for help. Typically, this includes FINRA using arbitration to try to resolve the dispute.

Arbitration is a process for resolving disputes that does not involve the court system.

But almost 30% of FINRA arbitration awards were unpaid in 2020. The unpaid awards are part of a longer-term trend, according to the PIABA. In a press release, it says:

“The 2020 figures are consistent with FINRA’s previously reported statistics, ranging from 12% of dollars unpaid in 2015 to a high of 34% in 2018, and 22% of [customer] awards unpaid in 2015 to a high of 34% in 2017. In short, the problem is not improving since PIABA’s initial 2016 Report.”

A CNBC report says the lack of payments is a result of the fact that many brokers “don’t have sufficient reserves or the insurance to cover arbitration awards.”

Michael Edmiston, PIABA president-elect, lays the blame for the unpaid awards squarely at the feet of FINRA, saying the organization “has done nothing but discount the issue, abdicate responsibility, and boast about improvements that have ultimately failed.”

The PIABA report says FINRA can fix the problem by creating a national investor recovery pool. PIABA is asking Congress to pass legislation requiring FINRA to do so.

Without a fix, the PIABA says it could be only a matter of time before a “full-blown crisis” emerges. According to the report:

“When a market correction comes, weaknesses in poor (or fraudulent) investments schemes will be more apparent and likely result in shocking losses. Investors victimized by their financial professional’s mismanagement or fraud will roll the dice whether a successful arbitration claim will result in any actual recovery.”

A FINRA spokesperson told CNBC the organization “remains focused on reducing the amount of unpaid awards.”

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