Even though Puerto Rico's beaten-up municipal bond market improved last week,
beleaguered bondholders have swamped Finra's arbitration system with 200 lawsuits, forcing the regulator to delay cases until it can find additional arbitrators.
The Financial Industry Regulatory Authority Inc.'s Dispute Resolution unit informed plaintiff's attorneys of the delay last week.
“Finra can't handle the flood of Puerto Rico cases with such a small pool of arbitrators,” said Andrew Stoltmann, a plaintiff's attorney.
Puerto Rico's municipal bond market
has been struggling since last summer when Detroit filed for bankruptcy, inciting investor fears for Puerto Rico's $70 billion in municipal debt and setting off a wave of claims against the broker-dealers that sold the bonds. The S&P Municipal Bond Puerto Rico Index is down 15.24% over the past 12 months.
(Don't miss: UBS Puerto Rico faces 'Whopper' of a problem over muni bond funds)
Finra is actively recruiting arbitrators in Puerto Rico to handle the influx of cases, said Linda Fienberg, president of Finra Dispute Resolution. The delay applies only to the selection of arbitrators and was made at the request of lawyers for claimants, she said.
Finra arbitration panels typically have three arbitrators. A single arbitrator can hear small claims of $20,000 or less.
Finra has two ways to handle the shortage of arbitrators in Puerto Rico, Ms. Fienberg said. It can either recruit locally or send arbitrators to Puerto Rico from such nearby locales as Florida.
Finra's arbitration process most recently faced a similar shortage of arbitrators during the Morgan Keegan & Co. Inc. bond fund claims, of which there were more than 1,000, she said. It used a similar strategy to increase the arbitrator head count then.
“We are confident that when we complete the process, we will have enough arbitrators to handle all the cases,” Ms. Fienberg said.
Meanwhile, Puerto Rico was able to tap the municipal bond market last week, selling $3.5 billion in junk-rated bonds, with investor demand far exceeding supply, according to the Treasury Department of the U.S. territory.
Before the temporary halt in new arbitration cases, three class action law firms and one local firm in February tried to drum up interest in an “educational conference” for investors who suffered losses in UBS AG-sold funds by presenting Harvey Pitt, former chairman of the Securities and Exchange Commission, as a special guest at the meeting, according to an online advertisement for the event.
Mr. Pitt, now chief executive of consulting firm Kalorama Partners, was not available to comment.
UBS
was among the largest sellers of municipal bonds in Puerto Rico.
