FINRA Considers Making Broker-Dealers Carry Insurance Covering Arbitration Payments

The Financial Industry Regulatory Authority intends to weigh whether to mandate that brokerage firms have insurance covering payments for possible arbitration awards issued to investors. The SRO is aware that there has been frustration among claimants who have not received their awards.

It can be a problem when a brokerage firm closes its doors without paying legal claims and awards it owes customers. Making broker-dealers carry insurance could lower the amount of awards that go unpaid. Unfortunately, some firms have such a small financial cushion that they can be forced to close shop over just one arbitration award.

According to SNL Financial, which conducted an analysis for The Wall Street Journal, over 940 firms reported having a net capital of under $50,000 in financial reports from as recent as July. FINRA says that 11% of all arbitration awards issued in 2011 have yet to be paid-that’s $51 million. This is 4% increase from what was unpaid from 2009 and 2010.

It doesn’t help that a lot of small broker-dealers have a net capital of about $5,000 and no insurance to take care of arbitration awards. And even with the Securities and Exchange Commission’s rule that these firms have this net capital (or a level related to the brokerage firm’s debt if the amount is higher), this doesn’t make it easier for an investor to get his/her lost investment losses from securities fraud back. To have the brokerage firm go out of business makes it that much harder to recoup their investments.

Brokers from these failed broker-dealers go on to find other work in the industry with, according to the analysis. This can lead to the practice known as “cockroaching,” involving problems with one brokers going to another firm when he/she transfers there to work.

Shepherd Smith Edwards and Kantas, LTD LLP Founder and Partner William Shepherd is quoted in the US Congressional record for recommending to the Government Accountability Office that the Securities Investor Protection Corporation be expanded so that broker fraud is included and firms would have to pay SIPC accordingly.

“The last I checked, broker insurance for a clean broker for up to $1 million coverage per claim was about $2,000 per year (less than firms’ costs for stamps, as I said at the time),” said FINRA arbitration lawyer William Shepherd. “Attorneys, doctors and many drivers pay more. The average broker brings in over $100,000 per year, probably closer to twice that at most firms these days. Importantly, if brokers have many claims they will be cost prohibitive to firms or themselves. In this way insurance companies perform an important duty to the public. Just as drivers, doctors and others can be priced out of the business by their serial wrongdoing, so will financial advisor types.”

Our securities fraud law firm represents investors with FINRA arbitration claims and securities lawsuits against broker-dealers, brokers, investment advisers, and other financial representatives. Contact our investment fraud lawyers today.

Finra to Consider Requiring Brokerages to Carry Arbitration Insurance, The Wall Street Journal, October 4, 2013

Tracking Brokers Who Move Between Expelled Securities Firms, Barrons/FINRA, October 4, 2013

More Blog Posts:
FINRA Arbitration Panel Orders Citigroup to Pay Senior Investor Couple $3.1M for Alleged Broker Fraud Related to “Selling Away” Practice, Stockbroker Fraud Blog, September 17, 2013

FINRA Enhances Its Arbitrator Vetting Policy, Stockbroker Fraud Blog, August 26, 2013

Former Broker Claims He is the Reason FINRA’s Regional Director Resigned, While Ex-JP Morgan Broker Files Arbitration Claim Against His Former Employer, Institutional Investor Securities Blog, June 18, 2013