Finra gets arbitration process back on track in Puerto Rico

Regulator will fly in arbitrators from the Southeastern U.S. and Texas; Merrill Lynch and UBS agree to pay for translators

Apr 14, 2014 @ 2:07 pm

By Mason Braswell

puerto rico, bonds, arbitration, finra, regulator, merrill lynch, ubs
+ Zoom

Finra has expanded its pool of arbitrators and is ready to move forward with the hundreds of complaints related to collapses in Puerto Rico bond funds, according to an announcement posted on its web site Monday.

After several months of deliberation, Finra said it will resume processing investor complaints now that it has about 700 arbitrators from Southeastern U.S. and Texas who are willing to fly to Puerto Rico.

The Financial Industry Regulatory Authority Inc. has also resolved issues related to the language barrier as UBS AG and Bank of America Merrill Lynch agreed to pay fees for translators.

“I'm confident that we will have enough arbitrators and enough staff that we will be able to process those that go forward,” said Linda Fienberg, the president of dispute resolution at Finra.

(See also: Finra freezes new arbitration cases in Puerto Rico)

Finra, which had received around 200 complaints from investors, had stopped assigning arbitrators to new cases and was trying to determine how it would address a number of challenges, including the language barrier and the fact that there were only nine arbitrators in Puerto Rico.

One month ago, the regulator said it had heard from only 60 arbitrators on the mainland who said they would be open to flying to Puerto Rico to hear cases. That number has now jumped to nearly 700, according to Ms. Fienberg.

The regulator is also continuing to send staff members to Puerto Rico to scout for potential arbitrators locally and to help train them on an expedited basis, Finra said.

The decision to keep the arbitrations in Puerto Rico, where a number of the aggrieved investors reside, resolves a long-standing debate between claimants' attorneys and respondents over whether to allow investors living in Puerto Rico to have their complaints heard in arbitration forums in the Southeastern U.S.

Claimants' attorney Andrew Stoltmann of an eponymous law firm had argued it would be easier and quicker if they were able to fly investors to the mainland to have their cases heard rather than trying to find enough arbitrators who wanted to go to Puerto Rico.

“It's going to be difficult getting all these cases heard in Puerto Rico,” Mr. Stoltmann said. “They're going to create a big backlog and time delay for claimants.”

But attorneys for UBS had pushed to have cases heard in Puerto Rico where many of the witnesses, including branch managers and advisers named in complaints, were based.

Finra ultimately decided to play by its own rules, which provide for cases to be heard in the state or jurisdiction closest to where the claimant lives unless the claimant and respondent agree on a separate venue. Moreover, many of the claimants were elderly and travel would be burdensome, Finra said in its guidance.

Finra will foot the transportation costs for the arbitrators, Ms. Fienberg said.

“I think we have [found] a fair balance,” she said. “We also looked at where the transactions occurred and where the witnesses are and those factors let us to the determination that the cases should be venued in Puerto Rico.”

The final plan resembles the steps Finra took to handle the more-than 1,000 cases related to Morgan Keegan & Co. Inc. bond funds when it paid to fly in arbitrators to hear cases in the Southeast.

She added that around 80% of Finra cases are settled, so it may not be necessary to send so many arbitrators to Puerto Rico.

(More: Why one muni bond contrarian still sees opportunity in Puerto Rico)

Still, she said, the campaign to find more is continuing and the regulator is pointing out additional ways that claimants can help facilitate the process. She did not specify a goal for how many the regulator thought it would need, as not all complaints have been filed or processed.

Claimants' attorneys said the number of complaints could reach 1,000.

Typically, three arbitrators preside over claims over more than $100,000, requiring a list of 30 arbitrators for panels to choose from, placing a significant burden to find more arbitrators.

But Ms. Fienberg said that parties can agree to have their case heard by a sole arbitrator, helping to ease the demand.

Finra is also allowing arbitrators to hear more than one case related to the bond funds although that is atypical, given that some argue that an arbitrator's previous decision can be evidence of bias.

The regulator also said that it had gotten UBS and Merrill Lynch to agree to foot the bill for translators because most of the investors' native language is Spanish. The regulator also was asking other firms involved to help with the bill, Ms. Fienberg said.

Complaints have also been filed against Santander Bank, Oriental Financial Services Corp., and other firms.

UBS spokeswoman Karina Byrne said it stood behind Finra's decision.

"UBS respects Finra's decision to apply its longstanding venue rule when determining venue for these cases,” she said in an e-mail.

Get Daily News & Intel

Breaking news and in-depth coverage of essential topics delivered straight to your inbox.

X

Subscribe and SAVE over 72%

View our best offer
Subscribe to Print