Brokerage industry employment transitions – job cuts and the movement of registered representatives to other firms and independent channels – likely have led to a spike of industry-related arbitration cases.
In an analysis of Finra arbitration statistics through October, the Securities Arbitration Alert notes that the 2,929 cases filed since the beginning of the year show a 34% increase over the same period last year. Of the new cases, industry arbitrations were up 72%, while customer arbitrations were up 12%.
“What’s behind the industry surge in case filings? In brief: employment-related matters,” George Friedman, editor of the publication, wrote in a Dec. 6 blog post.
He pointed out that several categories of intra-industry arbitration “controversy types” have already exceeded their 2022 totals through the first three quarters of this year: breach of contract (248 cases compared to 225 in 2022); promissory note (132 compared to 84); libel or slander on Form U5 (90 compared to 84); libel, slander or defamation (79 compared to 69); and wrongful termination (61 compared to 50).
Friedman said “difficult” industry conditions that have led to job losses may be contributing to the increase in arbitration cases.
“If there are layoffs, arbitration naturally follows,” Friedman, a former director of Finra arbitration, said in an interview.
When brokers leave a firm of their own volition, it also can generate arbitration claims, such as those involving promissory notes and claims related to departing reps trying to take their clients with them.
“It’s probably related to larger forces in the industry – consolidation, recruitment and expansion,” said Ben Edwards, a professor of law at the University of Nevada Las Vegas. “We may be seeing [an increase in arbitration filings] as a downstream product of that happening.”
The Financial Industry Regulatory Authority Inc. runs the arbitration system that adjudicates disputes between customers and brokers and between brokers and firms.
Another factor that could have been catalyzing arbitration cases was a change in Finra policy regarding brokers clearing their records of customer complaints. Finra rules to clamp down on expungement went into effect in October.
“Brokers are trying to get their expungement requests in before the rule changes,” said Adam Gana, managing partner at Gana Weinstein. “The rush is expected but unfortunate.”
The expungement stampede combined with employment-related claims is “why there such a significant increase in filings,” Gana said.
Gana foresees an increase in customer claims related to private placement investments such as non-traded real estate investment trusts, business development companies and other direct participation programs. There was an increase in sales of those alternatives between 2013-16, and funds are usually tied up for six to 10 years.
As those investments wind down, customers may be upset with their performance.
“There will be an uptick in filings because there are going to be a lot of failures in alternative investments over the next year,” Gana said.
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