By Alfred Villoch, III
The issue of unpaid arbitration awards issued by FINRA against FINRA registered representatives is a growing concern in the financial industry, and it has garnered attention from organizations like PIABA (Public Investors Advocate Bar Association). Many investors who have been wronged by FINRA registered stockbrokers rely on FINRA arbitration to seek restitution, but the enforcement of these awards can be problematic, especially when FINRA representatives refuse to pay them. To address this issue, one proposed solution is to mandate that all FINRA-registered individuals carry insurance as a safeguard against unpaid awards.
The concept of mandatory insurance for FINRA registered representatives has its merits, as it could potentially reduce the risk of investors being left without recourse. However, this solution isn’t without its complexities and potential downsides.
One of the significant challenges is the trend of FINRA registered brokers transitioning to become solely investment advisers, often in the pursuit of offering more comprehensive financial planning services or avoiding certain regulatory constraints. If FINRA were to mandate that all its registered representatives must carry insurance, this might create an additional competitive disadvantage for FINRA as it may accelerate incentives for those who wish to operate as investment advisers outside of the FINRA regulatory framework.
The fear among these professionals is that mandatory insurance could increase their operational costs and make it harder for them to compete in a market where they are already contending with multiple regulatory obligations and potential legal liabilities. It might discourage some financial professionals from choosing the broker-dealer path in the first place, thus limiting the options available to investors.
A potential solution to this issue could be a nuanced approach that considers the following:
- Tailored Insurance Requirements: Instead of a one-size-fits-all approach, FINRA and the SEC could develop insurance requirements that are proportionate to the level of risk associated with a particular role or practice. This would ensure that professionals who deal with more complex or high-risk investments bear a greater insurance burden than those in lower-risk advisory roles.
- Transparency and Disclosure: Investment professionals should be required to disclose their insurance coverage to their clients. This transparency would empower investors to make informed decisions and understand the level of protection available in case of disputes.
- Consideration of Industry-Wide Insurance Schemes: Instead of individual policies, a collective insurance approach could be explored. This could involve industry-wide insurance schemes that share the risk among participants, making it more affordable and accessible.
- Balancing Investor Protection and Industry Competitiveness: Striking the right balance between protecting investors and ensuring the competitiveness of financial professionals is crucial. Any insurance requirement should be carefully designed to achieve these dual objectives.
Addressing the issue of unpaid FINRA arbitration awards is vital to maintain investor confidence in the financial industry. While mandatory insurance could be a valuable component of the solution, it should be implemented in a way that does not unduly burden financial professionals, particularly those who choose to operate as investment advisers.