Investor Attorneys Support Advisor Expulsion for unpaid arbitration awards


Groups representing investor lawyers are supporting a proposed rule that would allow state securities regulators to expel or suspend financial professionals and their businesses that fail to pay arbitration awards to investors who ‘they defrauded.

Proposal to reign of the North American Securities Regulators Association (NASAA) would give regulators the power to punish and even license any professional or financial firm that has unpaid arbitration awards or regulatory fines.

The Public Investors Advocate Bar Association (PIABA) and St. John’s University School of Law Securities Arbitration Clinic have written comment letters supporting the first such proposal, which NASAA President Melanie Senter Lubin said during a press conference last week. the organization plans to go through membership voting by the end of the year.

Nearly one in four dollars awarded to investors in 2020 went unpaid, even as the profits of many brokerage firms hit record highs, according to a PIABA report.

“In 2019 alone, more than $ 19 million in scholarships went unpaid. This represents almost 20% of all damages awarded that year, ”said Christine Lazaro, director of the St. John’s clinic and professor of clinical legal education.

The clinic agrees the proposal is “important because it creates clear repercussions for investment advisers who have not paid arbitration awards” and would prevent bad actors from simply moving on to the world of advisers to escape enforcement, he said. Lazaro said.

Since the Financial Sector Regulatory Authority does not have authority over advisers, “states must have clear authority to discipline investment advisers who fail to comply with arbitral awards,” she added. .

The rule allows state regulators to take into account a broker’s or representative’s default in payment as part of their investment advisor license. This “can help eliminate regulatory arbitrage as individuals regulated by Finra look to the advisory side of the industry,” Lazaro said.

“This is essential because investment advisers would no longer be incentivized to leave a brokerage firm as they have unpaid arbitration awards against them and move to a RIA with a new title and a clean slate,” said Lazaro, who said said the rules should be tightened. to ensure that they apply to registered investment advisory firms and that they must disclose these rewards to regulators and state investors.

Lazaro said that while the rule is a “noble effort” and would prevent bad brokers and representatives from committing other crimes, a fund to pay existing defrauded investors who have won in arbitration and cannot collect should be established.

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