According to FINRA, brokers and investments firms that violated the rules have paid out whatever money an arbitrator awarded their clients in the vast majority of cases. This is something that Jonah Engler has been monitoring quite closely, focusing strong on making sure that any investigations and allegations are not just properly conducted, but properly concluded as well. He found that, in 2016, only 2% of investors didn’t receive the money awarded to them following a complaint, a very positive figure.
Jonah Engler on the Business of Financial Investments
The securities industry, by and large, regulates itself. That doesn’t mean, however, that it doesn’t have to follow the rules. And there has been a really big drive towards greater transparency and reporting. This is why data has been published on how arbitration decisions are handled. Many advocates for clients have asked for this for a long time, because they worry that brokerage firms that end up in debt will never pay their clients, who then have to sell their own assets.
Academics and lawyers alike have provided examples in which investors have had to fight tooth and nail to get money back from brokerage firms that are under investigation following complaints. Indeed, in the summer of 2016, Reuters published an extensive report in which no less than 50 different firms were named and shamed, each employing brokers that are known to have received red marks on their records, including a variety of customer complaints.
There are some 3,700 securities brokerages in this firm and they are all overseen by FINRA. They also monitor the complaints that are sent in by customers. If necessary, arbitration panels hear these complaints and come to a decision. The arbitration panels, meanwhile, are made up of securities lawyers and industry people and their decisions are binding.
Records show that the arbitration panels that FINRA organizes were involved in 2,457 different cases in 2016. Generally speaking, around 70% of those cases are settled without having to go to full arbitration. In those cases, both parties come to a settlement agreement and they usually agree to seal that decision, so that others cannot see the amounts involved.
Of those 2,500 or so cases heard in 2016, the FINRA arbitration panels decided that clients should receive money 389 times. They have also reported that, out of those, only 44 stated that they did not receive the compensation they were awarded. While 44 is still too many, it does show that the vast majority of investment companies and brokerages pay their fines.
FINRA is currently heavily involved in evaluating its legacy systems, making improvements as and where necessary. FINRA was formally started in 2007, although it had operated informally before that. Between 1939 and 2007, the industry was overseen by the National Association of Securities Dealers. This has now been completely replaced by FINRA who are the official and accepted watchdog and who have the authority to make and enforce rules and regulations. They are committed to making this process as transparent and fair as possible.