The Financial Industry Regulatory Authority (FINRA) recently proposed a change to FINRA Rule 9554 which would eliminate the “inability-to-pay” defense in customer arbitration cases. The “inability-to-pay” defense frustrates a customer’s efforts to collect on an arbitration award in their favor. The purpose of the rule change is to increase the probability that customers will be paid by FINRA members or associated persons.Under FINRA rules, once an arbitration award has been issued by the arbitration panel, a member or associated person has thirty days in which to pay the award. Failure to timely pay results in FINRA initiating an expedited proceeding against the member or associated person. A member or associated person may be suspended if they either fail to pay the award or fail to request a hearing before FINRA.If a member requests a hearing, one of the defenses available to prevent a suspension is establishing a bona fide inability-to-pay the award. If the member or associated person demonstrates an inability-to-pay, they will not be suspended and the customer is precluded from collecting on the arbitration award. FINRA lacks subpoena power over banks and other third parties which makes it difficult for FINRA to accurately assess a member or associated persons financial condition and true inability to pay an award, and means that the “inability-to-pay” defense may sometimes be abused.By eliminating the “inability-to-pay” defense, FINRA hopes to increase the payment of awards, or at least prompt settlement discussions between the parties, in furtherance of its goal of protecting investors.The proposal has been submitted to the Securities and Exchange Commission for approval. You can read the text of the proposed rule here.