Finra sees uptick in arbitration cases filed in first quarter
The number of arbitration cases brought before Finra was up 10% in the first quarter over a year ago and the proportion of cases resulting in damages being awarded was also up. At least one factor has emerged as the main culprit.
The number of arbitration cases brought before the Financial Industry Regulatory Authority Inc. is on pace to exceed the total from last year, according to statistics compiled by the broker-dealer regulator.
Finra said that during the first three months of the year, 1,011 arbitration cases have been filed. That compares to 919 in the first quarter of 2013 and 1,183 in the first quarter of 2012. The total number of cases filed in 2013 was 3,714, while 4,299 cases were filed in 2012.
One likely factor in the uptick this year is the hundreds of cases that Finra has received from investors who have been burned by the collapse in Puerto Rico municipal bond funds, according to Bryan Ward, a partner at Sutherland Asbill & Brennan.
Last week, Finra announced that it had expanded its pool of arbitrators to handle the Puerto Rico caseload. The number of Puerto Rico complaints could rise and push the total number of arbitration claims higher, depending on how plaintiffs fare.
“We’ll have to see how the Puerto Rico bond cases play out,” Mr. Ward said. “A few big wins can be a strong marketing tool for getting more clients.”
The number of arbitration cases closed is running behind the previous two years. In the first quarter of this year, 946 cases closed, compared to a total of 4,498 and 4,877 closing in 2013 and 2012, respectively.
The proportion of arbitration cases that resulted in damages being awarded to clients this year is running ahead of the previous two years. Finra said that 50% of cases that were decided in the first quarter — 55 of 109 — resulted in damage awards, compared to 42% for all of 2013 and 45% for all of 2012.
Over the last couple of years, Finra has eased rules surrounding the makeup of the three-adjudicator arbitration panels. The default option now is an all-public panel. Alternatively, claimants can choose two public arbitrators and one arbitrator with a financial industry background.
In the first quarter of the year, all-public arbitration panels awarded damages to customers in 48% of cases they heard, while a split panel awarded damages in 45% of the cases before them. That compares to 43% for all-public panels and 44% for split panels in all of 2013 and 49% and 33%, respectively, in all of 2012.
In the pool of 6,375 Finra arbitrators, 3,547 are public and 2,828 are non-public. Nearly every brokerage contract with clients includes a mandatory arbitration clause that sends customer disputes to Finra, the industry-funded regulator.
The leading claim in arbitration cases this year has been breach of fiduciary duty, followed by negligence, breach of contract and failure to supervise. Breach of fiduciary duty also was the leading claim in 2013 and 2012.
This trend consistently shows up even though Finra enforces the suitability standard that applies to brokers when they sell investment products and not the fiduciary duty that governs investment advisers’ interactions with clients. Attorneys usually try to broaden their cases in Finra arbitration.
“There’s typically not a fiduciary duty in those [broker] relationships, but it’s alleged as a claim in customer arbitration,” Mr. Ward said.
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