Securities Brokerages Free to Be Uninsured for Legal Awards

By | September 29, 2014

The industry group that regulates securities brokerages has decided it cannot force firms to carry insurance for payment of awards granted by arbitration panels or courts to customers who have lost money, a spokeswoman said on Monday.

After agreeing a year ago to consider an insurance requirement, officials from the Financial Industry Regulatory Authority decided they could not impose one.

FINRA oversees investment brokers, from large firms like Merrill Lynch and Charles Schwab to the 5,000 independent broker-dealers that operate across the country, many of which are managed by only a handful of people and have net capital requirements of $100,000 or less.

Without insurance, brokerage firms often cannot pay judgments or arbitration awards lodged against them. If an award is higher than the total in their bank accounts, the firms close up shop and their principals, if they are named in the cases, declare bankruptcy. Customers judged to have been treated unfairly are out of luck.

“We researched various types coverage in this area and found that insurance underwriters didn’t necessarily want to cover ‘higher’ risk firms, precisely the ones about which we are most concerned,” said Nancy Condon, a spokeswoman for FINRA.

“We found that if an underwriter was to cover those firms, and would spread the risk across all firms, the cost became prohibitively high.”

On Sept. 17, a group of investors won a $3.9 million judgment against brokerage firm Resource Horizons Group, after the firm failed to supervise a broker who was running a fraud scheme on the side.

The judgment is larger than the brokerage’s net capital, which was $558,628 as of Dec. 31, 2013, according to regulatory filings. This raised questions about how it would pay the investors, since it does not carry arbitration insurance.

Alan Wolper, who represented Resource Horizons and three of its principals in the case, said his clients had 30 days to decide whether to declare bankruptcy or try to get the decision overturned by appeal. The three individuals named in the complaint, including the brokerage’s president and its chief executive, are also liable, according to the award.

“I don’t know that they’re going to be able to pay this award,” he said.

In 2012, the latest year for which data is available from FINRA, brokerage firms failed to pay $50 million in awards to customers. In 2011, unpaid awards totaled $51 million.

“I’m seeing more and more of this, personally,” said Joe Peiffer, a securities lawyer who represents retail investors in cases against brokers.

“I’ve had exponentially more people come in this past year that I’ve ended up having to turn away for collectability than I’ve had in the prior 14 years,” he said.

Peiffer said securities lawyers often call small brokerages to find out whether they have insurance before the agree to take client cases. He is working to pull together his own statistics on how many brokers operate without insurance.

(Reporting By Emily Flitter; Editing by David Gregorio)

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