Friday, May 3, 2019
The proposal calls for particular firms to set aside additional capital to pay possible awards. FINRA described the idea:
As part of FINRA’s ongoing initiatives to protect investors from misconduct, FINRA is requesting comment on proposed new Rule 4111 (Restricted Firm Obligations) that would impose tailored obligations, including possible financial requirements, on designated member firms that cross specified numeric disclosure-event thresholds. These thresholds were developed through a thorough analysis and are based on the number of events at similarly sized peers. The member firms that could be subject to these obligations, while small in number, present heightened risk of harm to investors and their activities may undermine confidence in the securities markets as a whole. The proposal would further promote investor protection and market integrity and give FINRA another tool to incentivize member firms to comply with regulatory requirements and to pay arbitration awards.
On the whole, this seems like a step in the right direction. It remains to be seen how significantly this proposal could reduce total unpaid awards.
Still, other options might be more effective or work in conjunction with this proposal. In the last Congress, Senator Warren and Senator Kennedy co-sponsored legislation requiring FINRA to create a pool to cover unpaid awards. This approach would make the entire industry responsible for the problem. The new regulatory notice does not go as far or provide as strong a guarantee, but it's probably still an incremental improvement over the current system.