Rising markets keep advisers out of arbitration

Finra experienced slight increase in 2016 cases, but total continues to be far below post-recession highs

Feb 23, 2017 @ 2:38 pm

By Mark Schoeff Jr.

Rising markets produce happy investors who are less likely to file arbitration claims against their brokers.

Although the total number of arbitration claims rose 7% over the last year — 3,681 cases were filed in 2016 compared to 3,435 in 2015 — the total number remains far below the level hit in 2009 after the market collapse, when 7,137 cases were filed, according to statistics published on the Financial Industry Regulatory Authority Inc. website.

"Finra's had a chance to work out a lot of those [post-crisis] cases," said Rick Ryder, president and editor-in-chief of the Securities Arbitration Commentator. "Finra is at a point where it's pending cases are made up of new cases."

The broker-dealer self-regulator is also making its way through cases focused on Puerto Rican municipal bonds. That market dropped precipitously in 2013, contributing to the 684 municipal bond fund cases and 553 municipal bond cases filed in 2014. The number of cases in each category dropped to 480 and 433, respectively, in 2016. The wirehouse UBS has been the target of many Puerto Rico claims.

There has not been a wave of new arbitration disputes because the market has been good to brokerage clients.

"People don't fight so much when they're making money," said George Friedman, a former Finra arbitration director and owner of an eponymous consulting firm. "They fight more when they're losing."

The era of relatively good will is continuing through the first month of 2017, when the number of cases filed dropped 14% from last January — from 264 to 226 cases.

Cases filed to Finra, 2001-2017
Source: Finra. *As of January 2017

"The statistics from January 2017 are a harbinger of things to come," said Andrew Stoltmann, a Chicago securities attorney. "Absent a market decline of 20%, we'll continue to see a decline in the number of cases filed this year versus previous years."

A market that's trending up also tends to reduce broker movement and reduces the number of firm claims against brokers for failing to pay off recruiting loans, according to Mr. Ryder. The number of promissory note cases held steady from 2015 to 2016 at 401, down from 632 in 2013.

"When you're busy, you're not looking elsewhere," said Mr. Ryder, a former Finra arbitration director. "Promissory note cases are a reflection of migration and turnover."

The rising market notwithstanding, some products have experienced a spike in arbitration claims. For instance, the number of disputes involving limited partnerships rose from 79 in 2015 to 199 in 2016. The products can boost portfolio returns and offer tax benefits as well as high commissions for brokers. But they also are risky, especially those tied to oil and gas projects, and unsuitable for some customers.

Products that try to juice portfolio returns to make up for low-interest rates could make Finra's 7,126 arbitrators busier in 2017, if rates increase as forecast.

Promissory note cases
Limited partnership cases
Municipal bond cases
Municipal bond fund cases
Source: Finra. *As of January 2017

"I have a feeling we're going to see a surge of claims on structured products linked to interest rates," Mr. Stoltmann said.

A market downturn would send more clients to arbitration forums, said Hugh Berkson, a principal at McCarthy, Lebit, Crystal & Liffman.

Rising returns "tend to mask problems," Mr. Berkson said. "When there's a correction, problems inherent in these accounts will be revealed."

Where those cases are being heard will be revealed on Finra's dispute resolution page. Mr. Ryder said the regulator has become more transparent about its arbitrator staffing levels in different regions.

"It's helped me understand where the cases are coming from and Finra's efforts on recruiting," he said.


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