In securities arbitration, resolving a dispute through a favorable award is only the beginning. For investors, the critical step after winning an award is enforcement—ensuring that the compensation ordered is actually paid. Unlike traditional court judgments, securities arbitration awards are generally final and binding, with limited appeal options. This binding nature is intended to provide a swift, definitive resolution to disputes. However, enforcing an award is not always straightforward and often involves navigating several processes, particularly when the losing party is reluctant or unable to pay.
The Basics of Arbitration Award Enforcement
Once an arbitration panel reaches a decision and issues an award, the award becomes enforceable against the losing party. According to the securities arbitration, the award must be paid within 30 days of the decision, unless the party seeks an appeal or a vacatur (a judicial decision to nullify the award). Failing to pay an award within this period without taking further action may result in penalties or disciplinary actions from FINRA.
Filing for a Judicial Confirmation
If the award goes unpaid, the winning party—typically the investor—may need to seek judicial confirmation of the arbitration award to enforce it as a court judgment. Filing a motion for confirmation in a court of competent jurisdiction essentially converts the arbitration award into a legally enforceable judgment. This process is straightforward for awards rendered domestically, as U.S. courts usually uphold arbitration awards unless there are grounds for vacating it, such as evidence of fraud or arbitrator misconduct.
Once the award is confirmed by a court, it gains the full force of a court judgment. This status enables the winning party to use various collection methods, such as garnishing wages, levying bank accounts, or placing liens on property. In cases involving brokerage firms, however, awards are typically paid from firm assets rather than individual assets, simplifying the process slightly.
FINRA’s Role in Enforcement
FINRA plays an essential role in ensuring compliance with arbitration awards. If a broker-dealer or registered representative fails to pay an award within the designated 30-day period, FINRA may take disciplinary action, which can include suspension or barring from the industry. For brokerage firms that consistently fail to comply with awards, this can have serious business consequences, as suspension from FINRA essentially prohibits them from conducting any further business.
Additionally, FINRA has introduced initiatives to improve award compliance, including monitoring firms’ financial health and requiring that they set aside reserves for potential awards. This proactive approach aims to prevent situations where firms are unable to pay awards due to financial instability. Firms that fail to comply with payment requirements risk severe consequences, including suspension or expulsion from the securities industry.
Challenges with Award Collection
Despite these protections, collecting an arbitration award can still be difficult, especially if the losing party is financially insolvent or has filed for bankruptcy. In such cases, the winning party may find it challenging to recover the awarded amount fully, and bankruptcy proceedings can complicate the enforcement process. Some investors are unable to collect because smaller, independent brokers lack the financial resources to pay large awards, even if FINRA sanctions them.
To address this, investor advocates have pushed for the establishment of a Securities Arbitration Recovery Fund. This fund, which FINRA has considered, would assist investors in collecting awards when the losing party cannot pay. Such a fund would provide financial support and help reinforce investor confidence in the arbitration process, ensuring that arbitration is an effective remedy for disputes rather than a symbolic victory.
The Path to Award Recovery
Securities arbitration can provide a streamlined, efficient path for investors to resolve disputes and secure compensation. However, award enforcement remains a critical and sometimes challenging final step. By understanding the procedures, including judicial confirmation and FINRA’s enforcement role, investors and firms can better navigate this process. While challenges like bankruptcy and unpaid awards persist, regulatory efforts and proposals for support funds continue to develop. Together, these mechanisms aim to make arbitration not just a fair but a truly effective means of resolving securities disputes.