By Nate Irvine

Going to an arbitration proceeding can seem like rolling the dice. Arbitrators may be biased, expert witnesses can be persuading, and attorneys might be overconfident or less than stellar. However, in extreme cases an X-factor exists. The broker could go belly up and leave the claimant penniless. In fact, this is a growing concern for smaller brokers and FINRA is searching for an answer.

The following represents a sample of alternatives:

New Insurance Requirements

Force brokers to purchase insurance that provides coverage for arbitration awards. The premiums would most likely be very expensive. Most firms in the industry whether big, or small, would probably not support the increased expense. Furthermore, the last thing anyone wants to do in the current economy is choke off small business growth with excessive regulation.

Raise Capital Requirements

FINRA has no power to raise the capital requirement because that power belongs to the Securities and Exchange Commission (“SEC”). The SEC already requires every brokerage firm to maintain certain capital requirements to cover liabilities, which includes arbitration awards. It would take the SEC years to raise its requirements because of the powerful brokerage lobbyists. Besides, such a solution is not all encompassing because it would not provide adequate protection for investors whose brokers close up shop regardless of increased requirements.

Industry Insurance Fund

Another potential option is for FINRA to create a fund that every broker is required to make an annual contribution to. There are about 630,000 brokers that FINRA regulates, so such a fund could be created by forcing brokers to pay minimal contributions. However, some attorneys believe this solution would cause brokers to take unnecessary risks, leading to an increase in bad business practices. Yet the risk might be mitigated by capping the amount investors could recover.

Extend SIPC Coverage

The Securities Investor Protection Corporation (SIPC) provides insurance for customers when brokerages fail. However, they do not cover arbitration awards. Some believe that SIPC coverage should be extended to include arbitration awards. However, the biggest brokers in the industry are unlikely to support such an idea because they already pay their arbitration claims.

Conclusion

In order to be competitive in the industry, smaller brokers utilize a variety of enticing sales tactics to gain new clients. However, greater rewards equal greater risk, which includes the possibility of forfeiting arbitration awards. Buyer beware in the short term, there is no clear solution to the problem at hand and most seem skeptical of solutions proposed to mitigate damages produced by smaller brokers that fail.

For more information on this article can be found at: Solutions to Unpaid Arbitration Awards