The Financial Industry Regulatory Authority (FINRA) recently proposed a change to
FINRA Rule 9554 which would eliminate the “inability-to-pay” defense in customer
arbitration cases. The “inability-to-pay” defense frustrates
a customer’s efforts to collect on an arbitration award in their
favor. The purpose of the rule change is to increase the probability that
customers will be paid by FINRA members or associated persons.
Under FINRA rules, once an arbitration award has been issued by the arbitration
panel, a member or associated person has thirty days in which to pay the
award. Failure to timely pay results in FINRA initiating an expedited
proceeding against the member or associated person. A member or associated
person may be suspended if they either fail to pay the award or fail to
request a hearing before FINRA.
If a member requests a hearing, one of the defenses available to prevent
a suspension is establishing a bona fide inability-to-pay the award. If
the member or associated person demonstrates an inability-to-pay, they
will not be suspended and the customer is precluded from collecting on
the arbitration award.
FINRA lacks subpoena power over banks and other third parties which makes
it difficult for FINRA to accurately assess a member or associated persons
financial condition and true inability to pay an award, and means that
the “inability-to-pay” defense may sometimes be abused.
By eliminating the “inability-to-pay” defense, FINRA hopes
to increase the payment of awards, or at least prompt settlement discussions
between the parties, in furtherance of its goal of protecting investors.
The proposal has been submitted to the Securities and Exchange Commission
for approval. You can read the text of the proposed rule