Brokerages Fail to Pay Nearly 30% of Penalties Awarded to Investors

October 4, 2021

Even after winning disputes with brokers and brokerages firms, many investors do not receive the compensations awarded to them, according to a new report from a watchdog organization.

Most disputes between investors and brokers are overseen by the Financial Industry Regulatory Authority (FINRA), an independent, self-regulatory organization. Most FINRA disputes are handled through arbitration with a panel of experts, a faster and cheaper alternative than going to court.

Unfortunately, nearly 30% of arbitration awards ordered by FINRA, awards that are intended to compensate harmed investors, went unpaid last year, according to a report from the Public Investors Advocate Bar Association.

In 2020, FINRA ordered 64 arbitration awards worth $20,895,826. Of these, 19 awards worth $5,050,328 went unpaid, according to the group’s analysis.

Though FINRA held fewer arbitration hearings last year due to Covid, the percentage of unpaid customer awards increased from 26.9% in 2019 to 29.7% in 2020.

The report found that the main reason these awards go unpaid is that brokers do not have sufficient cash reserves or the insurance necessary to pay investors, neither of which are required by FINRA or the Securities and Exchange Commission.

The analysis likely understates the scope of the problem, as arbitration attorneys regularly decide not to bring cases against brokers then know will be unable to pay.

FINRA has acknowledged the issue and says it has taken steps to improve the situation, such as requiring firms to preserve funds and expand insurance coverage, but truly addressing the issue would require federal legislation or new rules from the SEC.

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