One of the first issues we consider as a securities arbitration lawyer prior to bringing a claim against an investment advisor for unsuitable investments is whether the advisor can pay any judgment that is awarded. The advisor may have an expensive office in Stamford or Greenwich, but may not have the resources to pay a substantial judgment. The authority that regulates investment advisors and brokers has issued to rules to make sure that advisors and brokers have the resources to pay a judgment. On May 21, 2020, the Financial Industry Regulatory Authority (FINRA) (https://www.finra.org) amended its rules to prevent individual investment advisors and investment firms from avoiding payment of arbitration awards rendered in favor of wronged investors.
FINRA is the single largest independent regulatory body for investment firms which have operations in the United States. In fact, most firms are required to be a FINRA member in order to do business in the U.S. As a result, many investors are required to purse any legal claim that they may have against their investment advisor or firm through arbitration with FINRA. However, since 2012, investors have had increasing problems with actually collecting FINRA arbitration awards, as InvestmentNews points out in a recent report.
In response to this problem, on May 21, 2020, FINRA issued Regulatory Notice 20-15, which amends FINRA’s membership application program rules. The amended rule, which will take effect on September 14, 2020, will permit FINRA to deny new membership to registered investment advisors or firms that cannot demonstrate an ability to pay potential arbitration awards rendered against them. The rule will also require existing FINRA member firms with substantial pending arbitration claims against them to apply for continued membership. Through this process, the applying member’s ability to perform asset transfers or similar transactions will be scrutinized, as will the ability of individual advisors to switch firms.
While ability to collect a judgment will always be an issue, the news rules will make it more likely that we will be able to collect against the advisor. Regulatory Notice 20-15 provides great assistance to investors in determining whether to pursue a FINRA arbitration against an investment advisor or firm. If you have legal questions regarding a potential FINRA arbitration claim, please email Sam Fiano at email@example.com to schedule a consultation regarding your particular issue.