The recipients of billions of dollars in IOUs being issued by California soon may have a regulated market where they could sell them.
IOUs May Be Municipal Securities
Some of the nation’s largest banks say that, starting Friday, they will no longer accept the IOUs. The banks want to pressure the state to end its budget impasse, but their action could leave many businesses and families with fewer options for getting their money.
The Securities and Exchange Commission is going to recommend that the IOUs, which carry an annual interest rate of 3.75 percent, be regulated by the Municipal Securities Rulemaking Board as a form of municipal debt. The guidance could come as soon as Thursday, according to two people familiar with the matter who spoke on condition of anonymity because the SEC hasn’t yet acted.
A regulated market for the IOUs would make it easier for individuals holding them to sell them at a fair price, analysts said.
The SEC oversees rules set by the nongovernment MSRB. SEC spokesman John Nester declined to comment Thursday.
With JPMorgan Chase & Co., Bank of America Corp., Wells Fargo and Citigroup Inc. and some regional banks in the state saying they won’t accept the IOUs for payment after Friday, attention has turned to the possibility of a secondary market to buy up the notes.
A regulated market for the IOUs “makes it even more advantageous” for individuals holding them, who could sell them at a fair price, Maco said. The price they receive may be discounted in accordance with the market’s perception of the risk of the state repaying the notes, but it would be an orderly market price, he said.
SecondMarket, which creates marketplaces for the trading of illiquid assets, has received “decent interest” from hedge funds, municipal bond and distressed asset investors as potential buyers of the IOUs, Jeremy Smith, the New York-based company’s chief strategy officer, said this week.
What Is FINRA Arbitration?
FINRA arbitration is a method of resolving disputes between investors, brokerage firms, and financial advisors without going through the traditional court system. The process is administered by the Financial Industry Regulatory Authority (FINRA), the self-regulatory organization responsible for regulating broker-dealers and maintaining standards within the U.S. securities industry. Because most brokerage account agreements require customers to settle disputes through arbitration rather than litigation, FINRA arbitration has become the primary forum for investor claims in the United States.
In simple terms, FINRA arbitration is intended to provide a more efficient and less formal alternative to a lawsuit. When investors believe they have suffered financial harm due to broker misconduct—such as unsuitable investment recommendations, misrepresentation, excessive trading, or failures in supervision—they may file a claim through FINRA’s dispute resolution system. Brokerage firms and registered representatives that are members of FINRA are typically obligated to participate in the arbitration process when a customer files a claim.
The arbitration process begins when the investor submits a Statement of Claim to FINRA. This document outlines the relevant facts of the dispute, the alleged wrongdoing, and the amount of damages the claimant is seeking. After the claim is filed, the brokerage firm or broker—referred to as the respondent—files an Answer addressing the allegations. FINRA then assigns a panel of arbitrators to hear the case. Depending on the size of the claim, the panel may consist of one arbitrator or three arbitrators. These individuals are neutral decision-makers selected from FINRA’s roster and may include both public arbitrators and arbitrators with industry experience.
Once the arbitrators are selected, the case proceeds through several stages that resemble aspects of litigation. The parties exchange documents and participate in pre-hearing conferences that address scheduling and procedural matters. However, arbitration generally involves fewer procedural steps than court litigation. Discovery is more limited, and the process is structured to move more efficiently than a traditional lawsuit.
Eventually, the matter proceeds to an evidentiary hearing where both sides present their arguments. Witness testimony, documents, and other evidence may be introduced for the arbitrators’ consideration. After reviewing the evidence and hearing the arguments of both parties, the arbitration panel deliberates and issues a written decision known as an arbitration award.
This award determines whether the claimant is entitled to compensation and, if so, the amount that should be paid. Arbitration awards are typically final and binding, meaning they cannot easily be appealed. Courts may only overturn an arbitration award under very narrow circumstances, such as evidence of fraud, bias, or serious procedural misconduct.
FINRA arbitration plays an important role in the securities industry because it offers investors a forum to seek recovery when financial losses result from broker misconduct. At the same time, brokerage firms benefit from a dispute resolution process that is often faster and less costly than traditional litigation. While some critics argue that mandatory arbitration limits investors’ ability to bring claims in court, supporters contend that arbitration provides a practical and accessible system for resolving disputes.
Overall, FINRA arbitration functions as the primary mechanism for resolving conflicts between investors and brokerage firms. Through a structured yet streamlined process overseen by FINRA, arbitration is intended to deliver fair outcomes while supporting confidence in the integrity of U.S. financial markets. Contact us.