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Unpaid Judgments and Investor Protection - The Brokerage Insurance Problem

Meyer Wilson

Your brokerage firm mishandled your investment account. You hire a lawyer, who works for the next year to get you an arbitration decision awarding you the damages caused by the brokerage firm's misconduct. Then the firm closes its doors and you do not receive any of the money.

This problem is more prolific than you might expect. Brokerage firms and brokers failed to pay $50 million in awards to customers in 2012, the latest year for which data is available. In 2011, unpaid awards totaled $51 million, or about 11 percent of all awards. The percentage is up from 4% in 2009 and 2010.

How does this happen? Brokerage firms that are entrusted with the life savings of their clients are not required to have any insurance to cover the payment of arbitration awards to investors. Most people are not aware of this, as one would expect that the firms that hold our money would be obligated to maintain adequate insurance to cover any misconduct on their part. Drivers are required to show proof of insurance before they can drive down the road. Doctors are required to carry malpractice insurance. many states impose similar requirements on lawyers, while others require them to disclose to clients if they don't have insurance.

Many unpaid awards are against small, independent brokerage firms that typically are allowed to keep modest amounts - sometimes as little as $5,000 - on hand under U.S. Securities and Exchange Commission rules. About 2,350 brokerage firms, or more than half the industry's total, fall into this category, according to previously unpublished SEC estimates. These requirements make the financial cushion so thin that just one arbitration award could put them out of business. The customers of these firms certainly have no idea that the firm could be one claim away from closing their doors.

The fact that firms can risk millions of dollars of investors' money and yet are not required to have any insurance whatsoever is a problem currently being tackled by investors' lawyers.

FINRA, the Wall Street self-regulator that oversees brokerage firms, recently decided that it cannot force brokerage firms to carry insurance because it could be prohibitively expensive and difficult to obtain. One possible solution that investors' lawyers are discussing is prohibiting firms that are "uninsurable" from selling risky products, such as privately-issued securities and alternative investments. Those products are the ones that often lead to arbitration rulings against them.

While the issue remains unresolved, there are a lack of tools for investors to enforce the laws and duties of their brokers. PIABA expects to publish a report about the problems in early 2015, which the group hopes will help educate the public and lawmakers and affect a positive change.

Our six-lawyer firm represent individual and institutional investors who have claims against stockbrokers, brokerage firms and insurance companies for investment misconduct. If you would like to learn more about your legal rights and options, please call Meyer Wilson today at (888) 390-6491 or fill out a free consultation form.