Finra arbitration cases are down, but the rest of the year may tell another story

A former Finra director says wild market gyrations over the summer will induce arbitrations that could take months to fully reveal themselves

Oct 30, 2015 @ 2:04 pm

By Laura Sanicola

Finra has reported a decline in arbitration compared to this time last year.

According to September 2015 statistics, 2,538 cases were filed year-to-date through Sept. 30, a 14% drop from the same period in 2014, when 2,935 cases were filed.

But a former Financial Industry Regulatory Authority Inc. official said there is more to the statistics than meets the eye.

“The gap is closing with an uptake in filings in recent months, and that can't be ignored,” said George Friedman, who was director of Finra arbitration from 1998-2013.

At the end of June, the number of cases year-to-date was 25% below the same six-month period in 2014, according to a newsletter from the Securities Arbitration Commentator.

Further, more cases are entering into agreements to mediate, as figures through September are 20% ahead of the same time span in 2014, according to Finra.

“Our case filings are countercyclical to the stock market," a Finra spokeswoman said in an emailed response to questions, adding that officials were not surprised by the decline. "If the market goes down substantially, historically, we have seen a rise in case filings."


“Just what accounts for the apparent change in direction [on the mediation side], we cannot tell,” said Rick Ryder, founder of the SAC. “But maybe, like interest rates, there's no place to go but up.”

Mr. Friedman predicted that by year-end, total filings this year will be the same as last year, because the wild market gyrations over the summer will likely induce investors to file arbitration cases that could take months to make their way onto public records.

As for the surge in filings in recent months, Mr. Friedman theorized that Puerto Rican bond funds “are probably coming home to roost.”

Another notable trend from the September statistics is that the “preferred stock” product category is producing new claims. While preferred stocks were the source of claims in 47 cases all of last year, for the first nine months of 2015, the category has seen 110 claims.

“It's a pretty dramatic increase and a lot more difficult to explain,” Mr. Friedman said.

Overall, arbitration filings tend to follow the trend of the markets. Mr. Friedman noted that when the Great Recession hit, filings more than doubled. Following the recent bull market, he found that arbitrations dwindled from about 7,000 to almost half.

“People fight less when they are making money, and they fight more when they are losing money,” he said. “That's my theory.”

The most common arbitration cases included negligence, failure to supervise and misrepresentation.


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