Finra rule would let investors take arb claims to court if broker goes bankrupt during proceeding

Move is designed to address unpaid arbitration claims, but critic says it doesn't go far enough

Oct 19, 2017 @ 1:00 pm

By Mark Schoeff Jr.

Finra is seeking to allow investors in arbitration to take their claim to court if the brokerage or broker involved goes out of business during the proceedings. The regulator claims it will help plaintiffs collect their awards but a critic asserts the new rule doesn't go far enough.

In a regulatory notice released Wednesday, the Financial Industry Regulatory Authority Inc. proposed amending its arbitration rules to give a customer 60 days to withdraw their claim from the arbitration system and file it in court or amend the claim to add other targets from whom they may be able to collect if they win. The customer also could change their pleadings, postpone hearings and get filing fees refunded. Finra is taking public comments until Dec. 18.

"The proposed amendment is intended to help further address the issue of unpaid customer arbitration awards by expanding the options available to customers," Richard Berry, Finra executive vice president and head of the Office of Dispute Resolution, said in a statement.

But Andrew Stoltmann, president of the Public Investors Arbitration Bar Association, said the proposal falls short.

"The good news is it is an attempt to address the unpaid arbitration problem at Finra," said Mr. Stoltmann, a Chicago securities attorney. "The bad news is that it is such an incremental, de minimus step that it will have virtually no impact on solving the problem. All it does it push unpaid arbitration cases from Finra's docket to a court. The only true solution is for Finra to establish an unpaid-arbitration pot for investors who get stiffed in arbitration."

A PIABA analysis found that arbitration victors were unable to collect $62 million in awards in 2013, an amount that represented one quarter of all awards that year.

The latest proposal is not the last word from Finra on unpaid arbitration, according to spokeswoman Michelle Ong.

"This request for comment represents just one step in our continuing work on a very complex issue," Ms. Ong wrote in an email.

The proposal builds on a current Finra rule that allows investors to bypass arbitration, which is mandatory in brokerage contracts, if a firm goes out of business before a proceeding begins.

"It's a logical, positive extension of Finra's effort to protect investors dealing with defunct firms," said George Friedman, an adjunct law professor at Fordham University and a former director of Finra arbitration.

But customers could have just as much trouble collecting in court, according to Amy Lynch, president of FrontLine Compliance.

"If the individual or brokerage is out of business, the chances are slim that the customer would recover payment even if the judge ruled in favor of the customer," Ms. Lynch said.

In another regulatory notice released on Wednesday, Finra requested comments about whether it should continue to allow non-attorneys to represent investors in arbitration. Firna's arbitration task force recommended that it conduct a study to determine whether so-called NARs are competent.

"An issue with using a non-attorney representative is that, although arbitration is an alternative dispute resolution forum, the NAR cannot provide the legal expertise necessary to guide the client in making appropriate choices in bringing his or her claim," said Ralph Cursio, an attorney and a retail litigation expert with the Bates Group, a financial services consultancy.

Mr. Stoltmann praised the study as a "good preliminary step."

The deadline for comments on NARs also is Dec. 18. After reviewing the comments, Finra could amend the arbitration proposals. The rule changes would have to be approved by the Securities and Exchange Commission.

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