By: Dowdy White, Spring 2018 IAC Student Intern
You’ve probably heard of the phrase “jumping ship.” If a ship is taking on water and about to sink, it would probably be the best idea for you jump onto another ship to keep from drowning. As it turns out, this is actually a disturbing, but common, practice with broker-dealers. If a broker caused a claim to be brought against himself or his firm and the claimant was awarded a substantial amount that would bankrupt either the broker or the firm, the broker could switch firms and the firm could transfer its assets to a separate firm in order to avoid becoming inactive.
I like to think of this situation as insects, perhaps roaches, living under a big rock. When you pick up the rock and reveal the insects, they scatter and go hide under another rock. As soon as you pick that rock, they again find another rock. This cycle could go on for as long as there are more rocks in the yard.
Lucky for us, FINRA recently submitted a regulatory notice to combat this problem! Specifically, the proposed amendment addresses FINRA’s concerns in situations where a FINRA member firm hires a broker with pending arbitration claims, where there are concerns about the payment of those claims should they go to award or result in a settlement, and the supervision of those individuals, and when a member firm with substantial arbitration claims seeks to avoid payment of the claims by shifting its assets to another firm and closing down.
FINRA’s Department of Member Regulation evaluates every member firm’s and broker’s financial, operational, supervisory, and compliance systems to ensure that they are all meeting FINRA’s standards. FINRA’s proposed rule change would allow this Department to take a stricter approach when it comes to members and their unpaid arbitration awards and settlements. Specifically, this rule would give the Department the “rule-based authority” to deny a firm or broker’s application to move firms or establish a new firm if they are subject to pending arbitration claims.
Under the current rules, if the Department sees that a broker’s or firm’s application shows pending arbitration or an unpaid award, the broker or firm could still move forward in the application process if they can show their ability to satisfy the pending claims. If FINRA is able to move forward with this new rule, they would really be able to pull out their bug spray and put and end to the insect rock-hopping that is currently happening.
Though their progress may be slower than investors would like, FINRA seems to be showing more of an interest in helping prevent unpaid arbitration awards.