I have written before of the ferocious effort by PIABA lawyers to fight for their ability to collect attorneys’ fees on contingency matters – FINRA arbitrations – that they manage to win but which never get satisfied because the respondent broker-dealer has the temerity to go out of business rather than paying the award. PIABA members are clever enough not to make themselves the focus of the campaign, however; rather, they highlight the claimants, whom they characterize as being victimized twice, once by the bad broker and then a second time when the award is not satisfied. As I have said before, I am not sure why people who choose to sue broker-dealers should be put into a special category of plaintiffs who are assured of collecting if they prevail, whereas anyone else in America runs the risk that judgments they obtain may go unsatisfied.
Well, apparently, at least two US Senators have been convinced by PIABA that this is a scourge that must be addressed. Forget immigration. Forget tariffs. Forget Russia. It was reported this week that Elizabeth Warren (D-Mass) has been joined by John Kennedy (R-La) in a rare bipartisan agreement to co-sponsor a bill that would make PIABA’s dream come true, a law requiring FINRA to create a fund that could be tapped when respondents fail to pay adverse arbitration awards.
I won’t bother to comment on why Congress is dealing with this, given the host of other issues that it ought to be addressing. So, let’s look at the real problem. According to the proposed bill, the fund would be created using money that FINRA collects in fines from respondents in Enforcement actions. PIABA says that’s a winning formula, since the money will be coming not from taxpayers but from “bad guys” who violate FINRA rules.
But that’s just half the story. The money that FINRA metes out in fines is not just sitting around Robert Cook’s office in an envelope used to pay for the cakes and ice cream for his office’s monthly birthday celebration. It is millions of dollars. Last year, it was $73 million; in 2016, it was $176 million. Granted, not all of that is collected, but that which is received is used by FINRA to accomplish very real and (hopefully) very important things. According to FINRA’s Fines Policy, fine monies are used for “capital expenditures and specified regulatory projects that promote compliance and improve markets.”
In its 2018 Budget Summary, FINRA identified some of those projects that it paid for with collected fines, including “a successful multi-year effort to migrate FINRA’s technology environment from a data center structure to a cloudbased architecture, reducing expenses and increasing surveillance speeds,” moving its “continuing education program online in order to provide representatives with more flexibility to satisfy their requirements,” and the launching of “TRACE for Treasuries initiative to provide increased understanding and enhanced surveillance of the Treasury market through the reporting of secondary-market transactions in Treasury securities.” In addition, fine monies were also earmarked “to transform the technological infrastructure of the registration systems for member firms and individuals, providing a significant upgrade to a core tool that is used by FINRA, the SEC, state regulators, the industry and – through BrokerCheck – the investing public. The enhancements will transform the legacy registration systems to modern systems using open-source architecture and cloud-based infrastructure to deliver increased usefulness and efficiency.”
If fine monies are diverted from those intended uses and, instead, used to pay unsatisfied arbitration awards, then FINRA is going to have to come up with the money for its “capital expenditures” and “regulatory projects” from another source. And what source will that be? According to the 2018 Budget Summary, “[i]f fine monies are not collected in amounts sufficient to fully fund these projects, the Board authorized the use of reserves.” Well, how does FINRA replenish its reserves? Unfortunately, there is no significant source other than the member firms.
Members represent the principal source of nearly all the revenues that FINRA generates. The 2018 Budget Summary includes statistics that reveal that fully 88% of FINRA’s “operating revenues” come from the members in the form of “Regulatory Fees” – defined to “primarily include the Gross Income Assessment, Personnel Assessment and Trading Activity Fee,” all of which come from member firms – and “User Fees” – defined to “primarily include Registration Fees, Transparency Services Fees, Dispute Resolution Fees, Qualification Fees, Continuing Education Fees, Corporate Financing Fees and Advertising Fees,” again, all derived from members. Ultimately, if FINRA runs out of money to accomplish its goals, then necessarily it will be the members who pay through increased fees. But, I guess that’s not PIABA’s problem.
And, to close, let’s play a little “what if” game, to demonstrate that this proposed Congressionally mandated FINRA fund may dry up rather quickly. Say you are a PIABA member, and say you are aware of a BD that’s been hit with so many arbitrations that it’s teetering on the verge of bankruptcy, and is unable even to pay to defend itself. In the real world, an ethical attorney may have to dissuade a client from bringing such a case against that BD, notwithstanding the merits of the claim, and even though the BD might not even mount a defense, out of realization that any award obtained could not be satisfied. But, what if you knew that unpaid arbitration awards are simply resolved by dipping into FINRA’s shiny new fund? Why, then you would undoubtedly file your arbitration and ask for the most money imaginable. Even if the BD defaulted, you could rest easy that FINRA would step in to satisfy the award. Easy peasy money. And there would be an onslaught of new cases being filed to get some of it before it’s all gone.
This proposal, apparently in danger of actually becoming a law, needs to be tossed out.