The Financial Industry Regulatory Authority (FINRA) continues to struggle with enforcing brokerages to pay investors what they are owed. The broker-dealer industry continues to decline, with 3,901 broker-dealers open in August; a drop of 13% from 2011, when 4,456 firms were open, and a decrease of 20% from 2008, when 4,895 firms were open. Many of the broker-dealers struggle with rising legal costs and new technology and compliance costs. New regulations are also expected to be put in place, such as the Department of Labor’s fiduciary rule. Many times small firms go bankrupt and close without paying arbitration awards. Investors are then simply out of luck and receive nothing, despite winning arbitration awards.
For instance, Newport Coast Securities, closed its doors over the summer and its book of business and some of its biggest brokers went to another broker-dealer. 63% of Newport Coast’s brokers had at least one compliance mark, known as a disclosure event, which is a high percentage for brokers at a firm. According to Newport Coast’s profile on FINRA’s BrokerCheck, the firm “cannot meet the financial liabilities shown,” and its “total amount owed to customers, from pending and awarded arbitrations is $220,628.” FINRA must approve mergers, such as Newport Coast’s, and most broker-dealers carry insurance for investor claims, but limits on insurance can be low and doesn’t cover all types of claims. According to a report issued by a FINRA Dispute Resolution task force last year, in 2013, FINRA issued arbitration awards in 539 investor cases, of which 75 were not paid. In this case, the amount of unpaid damages equals $62.1 million. As far back as the year 2000, the U.S. Government Accountability Office issued a report that said that the industry needed to address the problem of unpaid arbitration awards. In 2013, a FINRA representative told the Wall Street Journal that it was considering requiring firms to carry insurance to cover the payment of arbitration awards to investors, but, a year later, a FINRA spokesperson stated that no such thing would happen, that insurance would be too costly. The idea of a fund for arbitration awards has been brought up, but no such fund has been initiated, yet.