FINRA’s “Crackdown” on Unpaid Arbitration Awards Doesn’t Go Far Enough

It’s been said that “justice delayed is justice denied.” That old adage certainly applies to the issue of unpaid arbitration awards. When a brokerage firm or broker loses a securities arbitration before the Financial Industry Regulatory Authority (FINRA) and an award is issued, they are required to pay the award to the defrauded investor within 30 days. Many firms and brokers, however, do not do this, leaving investors in the lurch. FINRA then sends a letter to the  broker or firm, warning them that they will be suspended from FINRA if they do not pay within 21 days, per FINRA Rule 9554. By the time they have lost an arbitration, however, many brokers have chosen to hang up the reins; they have left the securities industry and thus have little incentive to fork over their cash to their victims. FINRA is finally taking a stand on this issue, but the self-regulatory organization’s actions don’t go far enough. FINRA must do more to make sure that brokers and brokerage firms pay up when they mess up.
unpaid FINRA arbitration awards
How many arbitration awards go unpaid every year? According to FINRA’s own statistics, in 2018, out of 145 cases in which damages were awarded, 43 of the awards went unpaid. That means that 30% of awards were not paid.  The value of the unpaid awards? $31 million. That’s $31 million owed to defrauded investors that has not been returned to them.
What is being done to address the issue of unpaid FINRA arbitration awards? For a long time, this issue went unaddressed, denying investors access to the money they are rightfully awarded. Thankfully, however, FINRA is finally doing something to ensure that investors receive payment for their arbitration awards. On May 27, 2020, FINRA announced new rules that will crack down on brokers and brokerage firms skirting around unpaid arbitration awards. The new rules, approved by the Securities and Exchange Commission (SEC), will take effect on September 14, 2020, according to Barron’s.
The rules will change FINRA’s membership process, allowing FINRA to deny new registration to a broker or brokerage firm that has pending arbitration claims and when there is uncertainty about the broker or brokerage firm’s ability or willingness to pay arbitration awards. Member firms with significant arbitration claims will be subject to increased scrutiny. If firms try to shift assets around or shut down to avoid paying an arbitration award, FINRA could sanction them. Of the cases with unpaid arbitration awards in 2018, five firms were inactive, and 19 individuals were inactive (meaning that their FINRA registration was revoked, terminated, or suspended). This is concerning because firms may become inactive so they can “fly under the radar” and avoid paying arbitration awards. The new FINRA rule will hopefully curtail this problem.
However, the new FINRA rule doesn’t go far enough. What does “increased scrutiny” entail? Who decides what constitutes a “significant arbitration claim”? The plan is vague. Furthermore, FINRA has not yet changed its policy that places the burden of recovering an arbitration award on the investor. It is up to the claiming party to ensure that they get their money. After going through the effort of an arbitration, it is unfair to place more burdens on investors and their attorneys. No one should have to go on a wild goose chase just to get the money they are duly owed. A solution to this problem would be for firms to have insurance, ensuring that investors receive the money they are owed. FINRA’s new rule doesn’t solve the issue of unpaid arbitration awards for the countless investors who are owed millions by companies and individuals who don’t re-enter the securities industry. The new rule is also not retroactive.
Let’s not forget that, as a self-regulatory organization, FINRA is run by the very brokerage firms they purport to regulate. As a result, it is important to have a securities attorney by your side as you go through FINRA arbitration.
Did your brokerage firm mess up? Are they now refusing to pay up? To learn about your options for recovery, call the securities attorneys of Fitapelli Kurta at (877) 238-4175 or email