It’s All About the Money, Honey

By: Dowdy White, Spring 2018 IAC Student Intern

One of the most iconic phrases in American entertainment is “money makes the world go ‘round.” First quoted on Broadway in the 1960s and made even more popular by a Liza Minnelli song, this phrase is even truer when it comes to FINRA arbitration proceedings.

When investors file a complaint against their brokers in an effort to recover lost investment capital and ultimately receive a damages award in their favor, what allows them to recover from a broker or firm that does not pay an award? Throughout this blog series, we have discussed that very topic. We have also discussed approaches taken by FINRA to be proactive in this field. But, what more can FINRA do?

According to the FINRA Perspectives on Customer Recovery, FINRA has considered a few different approaches that would enhance a firm’s resources to pay an award. According to FINRA, one possible approach that would help ensure that firms have the resources to pay arbitration awards is to raise firms’ net capital requirements when they are facing arbitration claims. To make this approach practically feasible, FINRA has considered: (1) requiring firms to take earlier recognition of potential damage awards for the purpose of making their net capital calculations, (2) change the requirement to “limit withdrawal” of capital when open arbitrations are significant, or (3) changing minimum net capital requirements to reflect arbitration claims.

For as long as anyone can really remember, the Securities and Exchanges Commission has set the broker-dealer capital requirements followed by every firm. In order for any change in these requirements to take effect, the SEC would have to amend or re-interpret the net capital rules.

Another approach considered by FINRA to help investors collect on damages awards is an expansion of Securities Investor Protection Corporation (SIPC) Coverage. SIPC, which was created by Congress, protects against the loss of cash and securities (like stocks and bonds) held by a customer at a “financially-troubled” SIPC-member brokerage firm. SIPC has about $2.5 billion fund, which is raised through assessments on its member firms, that is uses to provide each customer of a SIPC member with $500,000 of protection “against the possibility that the SIPC member firm will fail and be unable to return its customers’ cash and securities.” FINRA recommends increasing these funds in order to give customers more funds that they can use to recover from unpaid arbitration judgments.

If the SIPC-expansion package does not work, FINRA also suggests the creation of a second brokerage industry fund, separate from SIPC, to cover unpaid customer arbitration awards. According to FINRA, this second fund could be established by Congressional legislation, or by SEC or FINRA rulemaking. However, FINRA believes that Congress or the SEC should be involved in any decision to create this new fund because it might be construed to cover claims that Congress has determined should not be covered by SIPC. Simply, it does not want to overstep Congressional bounds.

FINRA believes that it can take affirmative steps in order to make sure brokerage firms have enough money to cover unpaid FINRA arbitration awards. Whether the firms have to keep additional capital on-hand or alter their insurance coverage, these plans really are all about the money, honey.