Tuesday, September 30, 2014

Can FINRA Force Firms to Insure for Arbitration Awards?

Every once in a while a group of customer attorneys bemoan the fact that some arbitration awards go unpaid. It is true - some arbitration awards do in fact go unpaid. So do court judgments, and without the benefit of a study, I would bet that a significantly higher percentage of court judgements go unpaid than arbitration awards.

Let's keep in mind that only in the world of FINRA does a person or entity lose its ability to conduct business if it does not pay an award in 30 days. This concept is completely unheard of in the rest of the country. Only a FINRA firm, or broker, is required to pay an award in 30 days or risk the loss of the ability of the firm, and all of its employees, to earn a living.

Draconian for certain, but it gets awards paid. The ones that do not get paid result from claims that are brought against defunct firms. Well, shame on the attorney for bringing that case, since you knew from the day you filed that you were not going to collect unless you went to the bankruptcy court. And that is a risk of living and working in a capitalist society - companies go bankrupt and leave their creditors without a remedy. (Unless you owe money to the United States, then you always owe the money, regardless of your bankruptcy filing).

The solution? Someone came up with the clever idea - since we already force firms to pay awards in 30 days without us doing anything to enforce the award, lets see if we can force the firms to buy insurance to pay for those awards!

Of course this ignores the legal underpinnings of insurance, and the fact that such insurance undoubtedly does not exit. And why doesn't it exist?

If you couldn't guess, here is the FINRA spokesperson quote announcing that FINRA was not going to require firms to obtain insurance to pay arbitration awards:
We researched various types coverage in this area and found that insurance underwriters didn't necessarily want to cover 'higher' risk firms, precisely the ones about which we are most concerned.
We found that if an underwriter was to cover those firms, and would spread the risk across all firms, the cost became prohibitively high
Shocking - the cost of providing insurance to insure that all arbitration awards get paid if the firm goes out of business are too high.  Imagine the insurance payout for cases that were pending against Lehman Brothers!

Let's face it. Not getting paid is a risk that hundreds of thousands of  plaintiffs this county face every year. There is no reason make any exception for the 4,000 of those plaintiffs who have arbitrations against brokers and firms. Companies go out of business, individuals file for bankruptcy. It is a fact of life.

It happens.It is a risk. But with an experienced and diligent attorney, and hard work, that risk can be minimized. Bring good cases, bring them in a timely fashion, and don't litigate your adversary into bankruptcy.  Be creative in your settlements with firms who are in financial trouble.

Think out of the box.

Mark Astarita is a securities arbitration attorney who has represented investors, firms and financial professionals, nationwide, in well over 600 arbitrations, for over 25 years. If you are interested in retaining him for a securities arbitration matter, before FINRA or any other forum, give him a call  at 212-509-6544 or email him.

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