As a background, every investor who opens a brokerage account with an investment firm agrees to arbitrate their dispute before the FINRA. Even if an investor did not open an account with a brokerage firm the claim can still be arbitrated under the industries rules. FINRA is the investment industries self-regulatory organization for all brokerage firms operating in the United States, overseeing approximately 4,700 brokerage firms and 635,000 registered representatives. FINRA both enforces its own rules through regulatory actions and administers an arbitration forum for securities disputes.
Our firm has noticed a recent trend where small and even mid-sized firms fail to keep sufficient funds on hand to pay investors due to misconduct at the firm. These smaller firms sometimes fail to enact proper supervisory procedures and regulatory controls to prevent their brokers from engaging in wrongful conduct. Sometimes these firms simply do not have the resources to properly engage in the securities business lines they attempt to engage in. As a result investors are harmed and due to their small size, cannot be compensated. In 2012, brokerage firms failed to pay $50 million in awards to customers. In 2011, the number of unpaid awards totaled $51 million.
As a result, the attorneys at our firm have advocated for brokerage firms to be required to hold insurance to protect investors. Investors should not have to bear the burden of the failures of small brokerage firms to properly conduct their business. As it stands today, it would difficult to identify any advantage for a customer to open an account with firms that do not carry insurance. If the brokerage firm engages in misconduct, it is likely the investor will have no avenue for redress. The failure of FINRA to require insurance forces customers to do business with more established firms and tends to limit the ability of new firms to enter the market place due to the fear that such firms cannot be held accountable if they fail.
According to the article, FINRA researched various types coverage and found that insurance underwriters felt that these brokerage firms represented a higher risk than they were willing to underwrite. Therefore, a requirement to hold insurance may very well have been difficult for brokerage firms to comply with or obtain at a reasonable cost. Unfortunately, those firms that are most in need of the insurance would be those firms that would be too expensive to cover. FINRA’s finding raises an interesting question, if the insurance industry wouldn’t bet on the ability of small brokerage firms to correctly handle investor’s business than why should any investor place their funds with these firms? Isn’t the insurance industries position itself an indictment of the ability of these firms to operate?
Case on point. On September 17, 2014, a group of investors were awarded $3.9 million against a small brokerage firm, Resource Horizons Group, after the firm failed to supervise one of its brokers who was running a fraud scheme. However, due to the size of the firm questions about how it would pay the investors arose since the firm does not carry insurance. In addition to the awarded claim, several other claims are outstanding against the firm, including one client of our firm. See Gana Weinstein LLP Files Complaint on Behalf of Former NFL Player.
The attorney who represented Resource Horizons has stated that he doesn’t think the firm will be able to pay the award. While FINRA’s decision to not impose an insurance requirement that could not reasonably be complied with is understandable, investors should not be left holding the bag for wrongs committed against them. The industry needs to come up with a plan to protect investors who invest with smaller firms.
The attorneys at Gana Weinstein LLP are experienced in representing investors. Our consultations are free of charge and the firm is only compensated if you recover.