Slideshow A bull market in FINRA arbitration claims? Here's what's driving disputes

Published
  • March 10 2017, 3:54pm EST
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Advisers and their companies faced more FINRA arbitration claims last year than they did in 2015, but not nearly as many as they did eight years ago.

The caseload has ebbed as economic tides have flowed, according to annual figures disclosed late last month by the regulator. The number of proceedings corresponds with busts like the Great Recession and the dot-com bubble, according to one mediator and consultant.

“Whenever an event like that happens, the filings for the next three or four years go way up,” says Dana Pescosolido, a retired attorney who runs his own mediation and consulting firm.

Pescosolido describes the statistics published monthly and yearly by FINRA as “awfully basic,” and he's supplemented that information through his own study, which adds a geographic angle to the official figures.

Pescosolido found correlations between hearing locations and the client’s chances of winning a case. He even came up with a new arbitration stat he calls “slugging percentage,” a familiar term for baseball fans.

To find out more on the trends in FINRA arbitration cases, click through our slideshow.

Fewer filings in the first month of the year

Both client filings and disputes among firms and their advisers dropped in January when compared to the same month a year earlier, according to FINRA. The regulator said 345 cases closed during the first month of the year, leaving 4,578 cases still open.

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Downward progression in caseload

Arbitration claims crept up by 246 cases in 2016 despite a steep falling progression in recent years. The caseload reached a 16-year high in 2003 of 8,945 cases. The figure, which Pescosolido says is product of the dot-com bubble, dropped by more than 5,700 cases over the next four years. However, the Great Recession pushed claims back up over 7,000 by 2009.

The annual count of cases closed tumbled below the number of cases filed that year, which was the last time caseload outpaced closings before 2016.

FINRA says 3,635 cases were closed last year, compared to 3,681 cases filed. The 46-case difference pales in comparison to the disparity of 2,566 cases seen in 2009, Pescosolido notes.

“In 2009, people had lost a lot of money,” Pescosolido says. “So you’re going to get a lot of filings.”

What clients allege

Clients pressed claims involving accusations of a breach of fiduciary duty more often than any other type of complaint, according to FINRA. Fiduciary duty claims led the way each of the past four years, rising by 195 cases to 2,002 in 2016.

Negligence (1,862 cases), failure to supervise (1,802), misrepresentation (1,670) and unsuitable investments (1,606) comprised the other top five types of claims.

Stock cases grow for fourth straight year

Claims around stocks marked the most common type of security involved in client cases in 2016. Clients pressed 646 claims involving stocks last year, a 6% increase over 2015. Cases about stock investments have increased by 18% over the past four years.

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Clients win slightly less often in 2016

Clients whose cases reached a formal decision received some form of award a bit less frequently last year than in 2015. Advisers and their firms paid 41% of the time in 2016, a drop of 1 percentage point from the prior year.

The figure, which Pescosolido refers to as the “win rate,” hit a five-year low of 38% in 2014 and a five-year peak of 45% in 2012.

Puerto Rico cases most successful

Client cases tracked by Pescosolido for the past two years won at the highest rate in Puerto Rico, though clients in New Jersey, Texas, California and Florida also won over half of the decisions in those states. Clients won in only 39% of cases in New York, by contrast.

Arbitration claims have piled up against UBS and other firms over the sale of Puerto Rican bonds and closed-end funds. Both the wirehouse and Santander have reached multi-million-dollar settlements with regulators, and Morgan Stanley has faced claims from clients as well.

Some cases that would have led to hearings in Puerto Rico spilled into Florida due to the large caseload, according to Pescosolido. He tallied only cases contested in hearings and involving individual retail clients who hired counsel. Pescosolido says he looks forward to analyzing more than two years of data in order to gain a larger sample size.

In future years, the data could show whether FINRA arbitration panels are more sympathetic to clients in one hearing location than another across the regulator’s 71 hearing sites nationwide. (A FINRA spokeswoman said no official data broken down by location was available and declined to discuss Pescosolido’s report.)

He notes, however, that California enjoys a reputation as a “consumer-protective” state, while his home state of Florida is an “elder-protective” state. The low rate of awards for clients in New York also stood out to fellow lawyers, Pescosolido says.

“A lot of these guys attribute the low success rate to a pool of more sophisticated and industry-knowledgeable arbitrators in New York,” he says.

Puerto Rico clients also win more of what they claim

The median level of award as a percentage of the claim also reached its highest level in Puerto Rico in 2015 and 2016, according to Pescosolido. He also found higher percentages in Texas and Florida than in New York.

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A novel stat to show client clout

Just in time for baseball’s spring training, Pescosolido borrowed a term from the sport for a new measure of arbitration outcomes. He created a “slugging percentage” for the jurisdictions from the product of the win rate multiplied by the level of award as a percentage of the claim. The stat, he says, measures how likely a client is to win and how much they could win, including “sweeteners” like attorney costs, arbitration fees and interest.

Promissory notes dominate cases between advisers and firms

Most disputes among advisers and firms centered on clawbacks, otherwise known as promissory notes. Such cases grew to 386 claims in 2016 from 373 in 2015, according to FINRA. A similar complaint, breach of contract, figured in 386 cases in 2016.

Most FINRA arbitration doesn’t reach a hearing

Arbitrators decided only 750 out of 2,861 resolutions tracked by FINRA, with settlements ending 1,812 of the cases, according to the regulator.