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FINRA Update: Should Broker-Dealers Be Required To Carry Insurance?

By George Miller  of Shustak Reynolds & Partners, P.C. posted on Tuesday, October 1, 2013.

On Friday, the Financial Industry Regulatory Authority (FINRA), Wall Street’s largest self-regulatory agency, announced it would consider whether broker-dealer firms should be required to carry insurance to help ensure payment of arbitration awards issued through FINRA’s dispute resolution forum. Virtually all broker-dealers require their customers and employees to arbitrate any legal claims–e.g., claims involving securities fraud, unsuitabile investments, breach of fiduciary duty etc.–through FINRA’s arbitration division.

According to FINRA, however, more than 940 member firms reported that they held net capital of less than $50,000.00 as of July 1, 2013. As a result, a single adverse arbitration award could wipe out a smaller broker-dealer, leaving arbitration claimants with no financial recourse. In fact, 11% of the arbitration awards issued through FINRA’s arbitration forum in 2011–awards totaling roughly $50 million–were never paid.

Most independent broker-dealer firms already require their registered representatives to carry insurance. Imposing a similar requirement on firms themselves would help to reduce the number of unpaid arbitration awards and provide some assurance to investors working with smaller broker-dealers.

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