So, you take a case through a full Financial Industry Regulatory Authority arbitration hearing, receive a nice arbitration award, but the check to pay off the award never arrives. The well-known secret among attorneys working in this area is that investors that pursue arbitration claims against financial professionals cannot always recover on the arbitration award. This secret is known to everyone except for the customer pursuing a FINRA arbitration claim.
Since the 1980’s (after a United States Supreme Court decision), most broker-dealers and many investment advisors require their customers opening accounts to agree in writing to arbitrate disputes concerning the account. FINRA operates the largest securities arbitration forum in the United States. Its primary role in the arbitration process is to administer cases brought to the forum in an efficient and fair manner. FINRA’s arbitration forum has 71 hearing locations throughout the country with at least one location in every state. The average turnaround time across all arbitration cases is 15 months. FINRA maintains a roster of more than 7300 arbitrators. I am one of them and, as an attorney, have tried FINRA arbitrations in Minnesota, North Carolina, Texas and Oregon.
Most arbitration cases involving customer disputes are resolved through settlement, mostly through a mediation. In 2016, there were nearly 2500 arbitration cases with only 16% closed by an arbitration award. Nearly three out of four cases settled before the arbitration.
Of those that went through an arbitration hearing, in 2016, nearly 1/3 of the arbitration awards went unpaid. Unpaid customer arbitration awards against firms primarily involve smaller sized firms of less than 30 brokers.
Yet, a broker-dealer has a strong incentive to pay, if it has the financial ability to pay. Under FINRA’s Customer Code, unless the respondent has a defense to nonpayment, a respondent must pay a monetary award within 30 days of receipt. FINRA suspends from the brokerage industry any member firm or associated person who fails to pay an arbitration award. See FINRA Rule 12904. In 2016, FINRA instituted expedited suspension proceedings against 20 active broker-dealers.
FINRA, however, does not guarantee that its members have the financial ability to pay an arbitration award. Many customers are disappointed to learn that the brokerage firm simply goes out of business or files bankruptcy. And it is a significant percentage of the cases that do not settle and go through a full arbitration hearing. This is a well-known secret that should be kept in mind when participating in a FINRA mediation.