About a month ago, I posted a blog about the apparent success that PIABA had achieved in getting two US senators — a Democrat and a Republican — to sponsor a bill to require FINRA to create a fund from which unpaid arbitration awards — and, of course, unpaid claimants’ counsel fees — would be paid. I complained about the proposed bill, and argued that it was flawed in a number of obvious ways. But, who listens to me.
Well, I was pleased to learn today that when the bill was presented to Senate Banking Committee, it hardly received a warm reception. To the contrary, it seems that the Committee members were less than excited about the prospect of FINRA creating this fund, even though the proposal calls for the fund to be sourced by fine revenue that FINRA collects from unfortunate respondents in Enforcement actions. The clever Committee members recognized a couple of very troublesome things about this proposal. First, there is no cap on the size of the fund. So, theoretically, FINRA will have to keep adding money to it in the event that the claims made against it exceed the initial contributions. Second, in that event, i.e., FINRA needs to put more money in than anticipated, that money will have to come from sources beyond the fine money, which means from member firms who are not respondents in Enforcement actions. Even US senators seem capable of recognizing that it is pretty poor form to require the rule-abiding members of FINRA to pony up money to pay the debts of other, less compliant, firms and individuals.
SIFMA weighed in, too, arguing against the proposed law. In addition to making the points outlined above, SIFMA also observed that requiring FINRA to use fines collected as the source of the fund creates “a perverse incentive for FINRA to increase both the number of enforcement actions that it brings, and the dollar amount of penalties that it imposes, in order to ensure that the recovery pool is adequately stocked.” I like the way that SIFMA thinks. While FINRA always denies that its decisions to bring Enforcement actions are in any way motivated by the fine dollars it might collect at the end of the case, it is undeniable that a need for additional fine money to deposit into the fund would create an actual conflict of interest. Much like at the end of my tenure with NASD in 2004, when senior management created objective measures by which the performance of the District Offices could be determined, one of which was the number of formal disciplinary actions we filed (it needed to be at least 10% of the number of exams we conducted to “pass”). Clearly, that criterion added incentive for NASD to file complaints, even if not merited by the evidence. The current FINRA proposal shares the same “ick” factor.
At the end of the day, the mere fact that PIABA has thrown its weight behind this bill should be enough to make the Committee think very hard about whose interests are at issue here. Is it really the investors, or is it their counsel? Every lawyer who files a complaint or a statement of claim in arbitration in an effort to collect money owes it to his or her client to explain not only the likelihood of prevailing, but, as well, the prospects of collecting on the award in the event they do, in fact, prevail. Collecting is never guaranteed. When collection is uncertain, it may not be in the client’s best interest to file suit. The proposed statute turns this principle on its head, essentially ensuring that claimant will collect, and that claimant’s lawyer, who has the case on a contingency fee basis, will get paid regardless of the success of collection efforts against the respondent. Given that, it is easy to see how arbitrations will undoubtedly increase in frequency should this bill gain traction. Let’s hope that the chilly reception it received at the Committee level is enough to put the kibosh on this proposal.