NASAA’s New Model Rules Target Unpaid Arbitral Awards
The North American Securities Administrators Association (NASAA) proposed new rules to try to reduce the stubbornly high number of arbitral awards for aggrieved investors who go unpaid. If states adopt the model rules, these regulators could apply tougher enforcement measures against registrants and non-paying businesses, including revocation of state-issued licenses.
The Model Rules amend the list of dishonest or unethical business practices of brokers / dealers, insurance agents and investment advisers to include non-payment of arbitration fines or failure to comply with the terms of a transaction. regulatory decision.
Although the national securities regulator, the Financial Industry Regulatory Authority, may prohibit people from working with companies registered by FINRA in order not to pay arbitration awards or to withdraw the registration of non-compliant companies, these individuals can still be registered under many state regulatory regimes. The NASAA decision is an attempt to give state regulators a common rule to apply in their individual jurisdictions.
The move comes in the following a recently published report of the Public Investors Advocate Bar Association (PIABA) arguing that the long-standing problem of unpaid arbitral awards is worsening. According to the analysis, around three in 10 of the FINRA arbitral awards released in 2020 went unpaid, with 24% of the money awarded that year either. In 2019, 27% of cases and 20% of total amounts awarded remained unpaid respectively, according to PIABA (the group conducted similar studies with similar results in 2016 and 2018).
PIABA has long advocated for FINRA to take the lead in creating a national investor recovery pool to help heal aggrieved consumers when advisers and businesses refuse or are unable to pay, calling it “the best and the best.” cheaper option ”.
While NASAA approved a model law last May To help some victims of securities violations get their rewards, in the request for comment, NASAA argued that a clawback fund might be difficult to set up because there is “no political support yet. generalized “. NASAA also argued that the amount of a clawback fund could be “limited,” that payments could be delayed, and that it would not address individual misconduct by an advisor or a company.
NASAA also said in its public letter that requiring companies to carry errors and omissions insurance to protect customers could be a daunting task because it is too expensive for small businesses (although an investigation by the NASAA in 2019 revealed that 77% of brokers / dealers surveyed had such Insurance). He also found that while E&O insurance typically provided for arbitrage, high-risk alternative products and fraud were often excluded from coverage.
According to Hugh Berkson, director of the McCarthy, Lebit, Crystal & Liffman law firm, as well as a former PIABA chairman and co-author of the PIABA report.
But, he stressed, victims suffering from unpaid compensation would always be lost.
“This prevents the same problem from happening to others,” he said. “It is not for those who have already been victimized. “
Nonetheless, Berkson praised NASAA for moving forward with the proposal. “I know NASAA has given this a lot of thought, and we absolutely commend them for that,” he said. “It would be great if we could get the interest of the SEC and FINRA to an equal degree, and get them to tackle the problem head-on.”
The NASAA proposed changes allow for waivers if “alternative payment arrangements” are made in writing between the b / d or investment adviser and the aggrieved investor, and the agreement is honored. Currently, an advisor or company must pay compensation within 30 days, unless they have a reasonable defense. FINRA can suspend the defendant for non-payment, which would prevent him from working or associating with an “active member of FINRA” until he does.
However, these suspended firms and advisers may still register with many state securities regulators through other means, allowing them to continue their practice until a reward is paid, depending on the request of NASAA comments. NASAA also asked members to consider a series of questions and asked for other ways the association could deal with unpaid client-initiated arbitration awards.
The association’s broker and dealer section committee developed the new rules, according to NASAA President and Maryland Securities Commissioner Melanie Senter Lubin. The association released the proposed models for public comment after the group’s board of directors approved their release this week.
The public comment period runs until November 5. Berkson said the new NASAA rules indicate that this issue is of growing concern to state securities regulators.