In a recent interview with the Wall Street Journal, Susan Axelrod, FINRA’s Executive Vice President of Regulatory Operations, said that the regulator is considering a requirement that brokerage firms maintain errors and omissions insurance to cover the payment of arbitration awards.
According to FINRA, since 2011, 11% of arbitration awards with a total value of $51 million have not been paid. The problem is that the financial cushion for small-midsize firms is so small, one arbitration award can put them out of business. Case in point, nearly three dozen brokerage firms went out of business after adverse arbitration awards against the firms resulting from the sales of Provident Royalties.
According to the WSJ, more than 940 brokerage firms disclosed in their most recent focus reports that, as of July, they have net capital of less than $50,000. According to unpublished estimates of the Securities and Exchange Commission, nearly half of all brokerage firms are only required to have net capital of $5,000 or a level related to the firm’s debts, if higher. Yet, these same firms risk tens of millions of their customers’ money.
Some state regulators told the WSJ that they support the idea of requiring firms to have arbitration insurance. Heath Abshure, Arkansas securities commissioner and president of the North American Securities Arbitration Association, told the WSJ that insurance would be helpful, if it is at an appropriate amount.