The Blog Of The Securities Industry Professional Association

FINRA Finally Listening to the SIPA



FINRA board to discuss an arbitration fund for investors 

For many years the SIPA has analyzed the actions and rules of FINRA and we have always been left puzzled as to how they cannot see the answer staring them in the face.  In some instances, they have taken a simple problem and made it completely complex, while in others they have taken something that wasn’t a problem and made it a big problem.  Perhaps FINRA has been reading the SIPA and our common sense approach to regulation and might be ready to do something about it?   In January we wrote a piece titled FINRA firing expensive bullets at zombies (Click here to read)  that took a blunt look at the way FINRA will continue to waste time and money for brokers who have long since left the industry and have a rap sheet a mile long.  Month after month their name appears in disciplinary actions as “Expelled”…again.

In addition we called for FINRA or the SEC to come up with a trustee or receiver scenario in which a firm that has assets, accounts and revenue can stay open and produce until the investors are made whole.   In one case, an online firm was ordered to pay back 13 million in private funds used to start the company.  They expelled him and then had 7000 online accounts moved at no charge to a competitor.  Wouldn’t it be more prudent to appoint a receiver and try to find a buyer or continue operations with a certain portion going into an investor fund?  FINRA appears to be taking small steps in this direction and at its last Board meeting a discussion was held regarding setting up an investor restitution trust account for unpaid arbitration awards.  Bravo for taking this first step, however once again a very simple solution is being made complex.   One of the proposals was to have every broker (about 700,000 of them) pay a fee of about $100.00 per year to fund the account for unpaid awards.  That would be roughly 70 million per year and on the surface that sounds like a splendid start but there is this little thing called PIABA Lawyers Group which chases brokers and firms relentlessly every chance they get.  Our worry is that once a group of layers found out there is over 150 million sitting in a kitty, their lawsuits will get even more aggressive and the amounts sought would be greatly exaggerated.  More importantly, this could cause settlements to decrease in the industry.  Why take a smaller amount when you know you have this large fund of cash you can tap into for your client’s award and your large legal fee?

We believe a much better approach would be to appoint a receiver when there is a functioning firm and large investor reimbursement due.  In the case of the now shuttered Gunn Allen, they had approximately 700 brokers across the country and 200 million dollars a year in revenue.  Due to being duped by a REIT in Texas, Gunn Allen had exposure of 40 million from client investors they represented.  In the middle of the night, FINRA ordered the firm closed because they were below net capital due to this pending liability.  700 brokers walked to other firms, the company closed down as Gunn and opened up as an OSJ of another firm and investors got nothing.   We think a smarter approach would be to work with the firm and the investors.  Why not appoint a receiver and earmark 5% of the company revenues toward an investor fund and target full restitution within 4 years?  In the case of a broker who will not pay an award and simply leaves the industry, we believe there should not be a 30 day window to pay.  If a broker is sincere, a post arbitration payment plan should be set up that allows him to continue earning while at the same time paying the award.  We also believe that in certain large awards, the employing firm should be able to make payments on behalf of a broker who left the industry without it counting against their net cap requirement.   It’s time to think outside the box and we think these ideas will work.  What do you think? Click here to join the SIPA !

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August 2nd, 2016




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