With hundreds of millions of dollars in investor arbitration awards going unpaid, a new report from securities regulators suggests that greater use of errors and omissions (E&O) insurance by brokerage firms could help solve the problem.
The report from the North American Securities Administrators Association (NASAA) said that while arbitration is the most common method of resolving disputes between investors and industry firms, when clients win these cases, they often don’t get paid.
It reported that research from the Financial Industry Regulatory Authority (FINRA) found that US$199 million in arbitration awards went unpaid between 2012 and 2016. Research by the Public Investors Arbitration Bar Association (PIABA) found that 36% of investors who won their arbitration cases in 2017 didn’t collect anything.
“We appreciate that this issue is complicated and are pleased that FINRA and others are studying it. But this problem is not fixing itself,” said Christopher Gerold, president of NASAA and chief of the New Jersey Bureau of Securities, in a statement.
NASAA’s report said that a survey of industry firms found that more than two-thirds carry E&O insurance, and at least 28 insurance companies are offering these kinds of policies.
Claims made under these policies are generally being paid, the report said, suggesting that expanded use of E&O insurance could help address the issue of unpaid arbitration awards.
“Unpaid arbitration awards remain an unresolved and well-documented investor protection concern. In failing to pay arbitration awards, broker-dealers breach their legal, regulatory and ethical obligations,” Gerold said.
NASAA’s research also found that just 4% of firms without E&O coverage cited the cost as the reason for not having it, and that only 9% of firms with coverage said that it is expensive.
“This rebuts blanket assertions that E&O insurance is too expensive or too difficult for smaller firms to obtain,” said Leslie Van Buskirk, chair of NASAA’s broker-dealer section and Wisconsin Securities Administrator, in a statement.
The report also noted that requiring brokerage firms to disclose whether they have E&O insurance could enhance investor protection.
“This would incentivize broker-dealers to obtain E&O coverage and would also allow investors to make more informed decisions about brokerage firms with which to do business. Some investors may wish to avoid firms without E&O insurance,” the report said.