SIFMA has declared itself very disappointed and looking for recourse, once again, after FINRA failed to address its concerns over the inability-to-pay defense, a hot-button issue for the trade group.
Since as far back as 2010, SIFMA, which represents several hundred broker-dealers, has pressured FINRA to change its rules so that a brokers inability to pay an arbitration award is no longer a legitimate way to avoid paying the firm whats owed while also avoiding suspension.
The issue often comes up in promissory note cases where the firm is looking to reclaim the unvested portion of a loan or recruiting bonus. Some brokers are successful in invoking the defense because FINRAs burden of proof and subpoena powers are lower than that of a bankruptcy court, according to Kevin Carroll, SIFMA's managing director and associate general counsel. (The cant pay defense was taken off the books for customer cases. Failure to pay client awards results in suspension.)
Now, the controversy seems to have taken on a life of its own. And unless one side gives in, this battle appears to have little chance of satisfactory resolution.
The opening salvo came in a six-page letter on the topic that SIFMA sent to FINRA in November 2011, which elicited a meeting, but no action. At that time, FINRA told SIFMA that a brokers inability to pay a firms award was a commercial dispute rather than one that raised investor protection concerns and so it did not have standing in the matter, Carroll says.
Unassuaged, Carroll reached out to the media in January 2012 saying, We expect within weeks to decide what our next course of action will be.
Weeks stretched into months and then SIFMA saw its next opportunity last April when FINRA was looking for comments on an unrelated matter: a proposed a change to Rule 8313, which would let FINRA publicly disclose in its monthly releases more information about brokers disciplinary records. SIFMA linked the issue back to the inability to pay debate.
Our concern is that many respondents that owe valid arbitration awards, and that successfully raise the inability to pay defense, are able to avoid the suspension that would otherwise be imposed under Rule 9554, and thus, would also be able to avoid the reporting of such suspension under proposed Rule 8313(a)(3), Carroll wrote in SIFMAs letter.
In other words, unless the rules are changed, brokers can continue to assert inability to pay as a valid defense instead of getting suspended. And if the broker is not suspended, well, then theres no suspension for FINRA to report in its newly expanded monthly release.
In a missive responding to public comment on the rule change, FINRA wrote off SIFMAs comment letter, saying that it was not relevant to the disciplinary disclosure debate:
One commenter stated its objections to a provision in Rule 9554 that precludes a respondent from raising the inability-to-pay defense against a customer complainant but not an industry complainant. The comment is outside the scope of the proposed rule change and will not be addressed herein.
This response sparked SIFMAs latest umbrage because it thinks FINRA is putting words in its mouth. While much of the letter was devoted to doing away with the inability-to-pay defense entirely, SIFMA added that as long as the rule remained on the books, it should be disclosed on a brokers record when invoked. But neither wish was granted.
FINRA knows were concerned with this issue and its hard to accept that the mischaracterizationof our position was inadvertent, he says. It was extremely disappointing.
FINRAs response to SIFMAs most recent displeasure? No additional comment.
Its back to square one, and SIFMA is now vowing to do once again what it vowed to do last year: We're going to circle back with our members and try to consider the best way again to get this issue before [FINRA] to elicit some sort of response, Carroll said.