November 16, 2021

Submitted via email: [email protected]

Securities and Exchange Commission
Attn: Ms. Vanessa Countryman, Secretary
100 F Street, NE
Washington, DC 20549

Re: Petition for Rulemaking to Amend FINRA Rule 9554 To Preclude a Respondent from Raising the “Inability to Pay” Defense Against an Industry Claimant1

Dear Ms. Countryman:

The Securities Industry and Financial Markets Association (“SIFMA”)2 respectfully petitions the SEC, pursuant to Rule 192 of the SEC’s Rules of Practice, to amend FINRA Rule 9554. Specifically, we request that the SEC amend FINRA Rule 9554 to preclude a respondent from raising the “inability to pay” defense against an industry claimant. As discussed below, FINRA’s current allowance of this defense against industry claimants raises significant investor protection concerns, contributes to the number and amount of unpaid arbitration awards, and avoids critical CRD/BrokerCheck disclosures that the investing public, industry, and regulators would certainly want to know about and act upon.

1 As used herein, the terms “respondent” and “industry claimant” refer to a FINRA member firm, or an associated person of a FINRA member firm, who owes a FINRA arbitration award, and to whom a FINRA arbitration award is owed, respectively.
2 SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly 1 million employees, we advocate on legislation, regulation and business policy, affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial MarketsAssociation (GFMA). For more information, visit http://www.sifma.org.

Executive Summary

When a respondent loses in arbitration, then fails to pay the award, FINRA proceeds under Rule 9554 to suspend the respondent. If the award is owed to an industry claimant, FINRA allows the respondent to claim the “inability to pay” the award. When FINRA allows this defense, the respondent avoids paying the award, avoids the suspension, and avoids any CRD disclosure. It is a great deal for
the respondent, but a raw deal for everyone else. The industry claimant goes unpaid. FINRA loses its leverage to compel payment. The dollar balance of unpaid awards increases.

By raising this defense, respondents admit that they cannot pay their financial obligations. Yet FINRA allows them to continue doing business as usual. CRD does not require disclosure that respondents claimed the inability to pay.3 Thus, respondents’ existing and prospective customers, prospective employers, and regulators have no idea. There is no notice, no transparency.

The inability to pay defense should be eliminated. Respondents should either pay their arbitration awards or be suspended from the industry. Alternatively, if the defense persists, respondents should be required to prominently disclose on CRD that they have relied upon this defense to avoid paying an arbitration award.

Overview of the Process for, and Defenses to, Unpaid FINRA Arbitration Awards.

Under FINRA rules, a respondent must pay a monetary arbitration award within 30 days of receipt, unless a motion to vacate has been filed in court.4 If the respondent fails to pay the award, then FINRA initiates an expedited proceeding under FINRA Rule 9554 and gives written notice to the respondent that failure to comply within 21 days of service will result in a suspension or cancellation of firm membership or a suspension from associating with any member firm.5 The respondent has the right to request a hearing, and must specify all defenses to the FINRA action.

Under FINRA Rule 9554, several defenses are available to the respondent, including:

• the member or person paid the award in full or fully complied with the settlement agreement;
• the claimant has agreed to installment payments or has settled the matter;
• the member or person has filed a timely motion to vacate or modify the arbitration award; and
• the member or person has filed a petition in bankruptcy and the bankruptcy proceeding is pending or the award payment has been discharged by the bankruptcy court.