Evaluation of Steps Taken to Address the Problem of Unpaid Arbitration Awards Page: 4 of 14
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for investors to establish claims and judgments against failed brokers. NASD-DR
redesigned its procedures to notify claimants if a member broker-dealer or individual
broker is no longer registered and, therefore, may not be influenced by NASD-DR
disciplinary procedures to pay awards. This change, which is to become effective in
June 2001, should provide investors with information they need to decide whether it
is in their best interest to proceed with arbitration or seek other means of redress.
NASD-DR also has developed a rule change to help investors pursue claims against
parties from which it may be difficult to collect award payments. In April 2001 SEC
approved a NASD rule that would preclude a broker-dealer firm that has been
terminated, barred, or suspended, or that is otherwise defunct, from enforcing a
predispute arbitration clause against a customer. This would allow the customer
(investor), instead, to seek legal recourse through the courts and establish a
judgment against any assets of the defunct broker. This rule change is to become
effective in June 2001. NASD-DR also is considering another rule change that would
streamline default proceedings whenever a terminated or defunct broker-dealer firm
or individual broker fails to answer or appear in a case and the claimant elects to
continue with arbitration. This change is intended to make it easier for the investor to
establish an award against a defunct broker-dealer or individual broker. NASD-DR
expects to file this proposed rule change with SEC later in 2001. These rule changes
should help investors save time and money in establishing their claims and judgments
against failed brokers or seek other means of redress. These changes would satisfy
the intent of our recommendation.
SEC and NASD-DR Have Taken Actions to Make
Investors Aware That Awards May Not Be Paid
To help investors avoid the possibility of having an unpaid award, we recommended
that SEC and SROs develop information to better educate investors about possible
award nonpayment. SEC and NASD-DR have acted on our recommendation that they
(1) develop and publicize information to focus investor attention on the possibility of
unpaid arbitration awards and (2) encourage investors to more thoroughly investigate
the backgrounds of broker-dealers and individual brokers with whom they intend to
do business. SEC has revised its online publications to contain information about the
potential for unpaid arbitration awards and to underscore the importance of
thoroughly investigating a broker's disciplinary history. The publications include
SEC's "Invest Wisely," "Ask Questions," and "Check Out Brokers and Advisors"
publications.3 For example, the "Ask Questions" publication contains the following
text:
"Which brokerage firm or individual broker you select is
very important for several reasons. You'll want to
investigate thoroughly before doing business with a broker
or firm that has a history of complaints or problems with
regulators. Also, you should know that if your firm or
broker goes out of business or declares bankruptcy, you
might not be able to recover your money-even if an
3These online publications can be accessed through the SEC Web site (www.sec.gov).GAO-01-654R Unpaid Arbitration Awards
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United States. General Accounting Office. Evaluation of Steps Taken to Address the Problem of Unpaid Arbitration Awards, text, April 27, 2001; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc298903/m1/4/: accessed March 29, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.