SIFMA Wants FINRA to Take Tougher Actions Against Brokers that Don’t Repay Promissory Notes

The Securities Industry and Financial Markets Association wants the Financial Industry Regulatory Authority Inc. to prevent brokers from being able to plead poverty to escape arbitration payment orders. The promissory notes provide money for retention and recruiting incentives, and as long as a broker agrees to stay with a financial firm for an agreed up on time, they are structured as forgivable notes.

Many brokers obtained such deals following the economic crisis. Since then, financial firms have gotten more active about submitting arbitration claims to get brokers to pay them back. In 2011 alone, 778 promissory note cases were filed. 1,152 such cases were filed the year before. In most cases, it is the financial firm that ends up winning.

When a broker won’t pay an arbitration award, FINRA files an action against him/her that could lead to suspension. However, if the broker demonstrates that he/she can’t pay it, then suspension may be avoided.

Many SIFMA members believe that FINRA should take more aggressive measures to get brokers to pay up. The trade group wants the SRO to prevent brokers from being able to claim that they cannot pay when slapped with a case from an industry claimant.
Such a move would likely mean that if a broker were unable to repay a promissory note, he/she would likely be suspended or have to file for bankruptcy. SIFMA also wants enhanced disclosure of awards that brokers don’t pay, because it believes that the consequence of having this failure made public is incentive for the broker to make good on the matter.

In a letter to FINRA that it sent last November, SIFMA voiced members’ concerns that the inability-to-pay defense was being abused and that not only was this resulting in compliance and regulatory risks, but also it was creating an unnecessary risk to investors. SIFMA claimed that FINRA Rule 9554 discriminates against industry claimants, who aren’t given the same protections as customer claimants, who don’t have to contend with the inability-to-pay defense from a broker. The trade organization noted that the Securities and Exchange Commission obligates FINRA to take appropriate disciplinary action against defendants that use this defense in bad faith.

SIFMA, Finra clash over deadbeat brokers, Investment News, January 15, 2012

FINRA Rules

Securities Industry and Financial Markets Association

More Blog Posts:
SIFMA Offers Up Best Practices for How Financial Firms Can Interact with Expert Networks, Institutional Investor Securities Blog, October 16, 2011

SEC and SIFMA Divided Over Whether Merrill Lynch Can Be Held Liable for Alleged ARS Market Manipulation, Institutional Investor Securities Blog, July 29, 2011

Micah S. Green, Expected New CEO of Largest Securities Industry Group, Resigns During Scandal, Stockbroker Fraud Blog, May 18, 2007

For more than two decades, Shepherd Smith Edwards and Kantas LTD LLP has successfully represented thousands of individual and institutional investors that have sustained financial losses because of broker fraud. Our stockbroker fraud law firm would be happy to offer you a free consultation to help determine whether you have a claim.

To reach one of our securities fraud attorneys online you can contact us online or call 1-800-259-9010. You may be able to recoup your investment.