FINRA Stats, 3/20: First Quarter 2020 Ends with Little Change in Case Volume from Last Year…, But Wait!
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In our monthly report on the February 2020 statistics FINRA Dispute Resolution Services* (FINRA-DRS) posted at the end of March (see SAA 2020-13), we noted that the case filing statistics were coming in, as they had in 2019, at a steady pace of around 300 per month. We also indicated that intra-industry claims were running high at about 45% of the whole.

In FINRA-DRS’ March report, which issued last week, the intra-industry percentage heightened further, moving up to 48% of the 946 claims filed (vs. 592 in February) in the first quarter. In other words, while customer claims stayed relatively even at 167 new claims submitted in March, intra-industry claims surged about 50% from its norm to 187 new claims! Taken together, the March total added 354 new case filings, so that, at the three-month mark, 14% more customer claims have been filed in 2020 than in 2019 at this point and 33% more intra-industry claims.

Customer Claims - Anything Different?

FINRA-DRS provides information on the top 15 controversy types among the customer cases and the top 15 products or “Security Types” involved in customer arbitrations. We do expect to see margin liquidation claims rise, as a consequence of the Corona Crash that took the Dow from 29,000 to 19,000, before it began a partial recovery. If there were account deficits, we would see broker-dealers pursuing collection actions against customers pretty early in the cycle (although they tend to avoid arbitration in such matters) and, later, we can expect customer-initiated claims against their BDs alleging improper and unnecessary liquidations. March is too soon, however. Among the Controversy Types, one sees little change in the case distribution; a small rise in “Error Charges” and “Execution Error” claims might be discerned. On the product side, though, claims involving “Private Equities” and REITs are moving upwards. Fixed-income claims are down, especially in the Municipal Bond and Municipal Bond Fund sectors, signaling, we believe, a dwindling of fresh Puerto Rico bond cases. There were only 111 such cases in this past quarter versus 270 in 2019’s first quarter.

Industry Claims – Where’s the “Beef”?

What caused the surge in industry cases this past month? Disputes relating to compensation seem to be on the rise and in the category for “Promissory Notes” -- collection matters against brokers for employee forgivable loans -- the number of new claims blossomed from 52 for the first quarter of 2019 to 91 in the quarter past. While we can expect expungement claims to taper down a bit after the new changes to FINRA’s arbitration rules are approved, no diminution in new cases is apparent from FINRA’s charts.  The furloughing of brokers, to the extent that’s a consequence of the Covid-19 crisis, will not necessarily trigger a big hike in note cases, in our view, but we would look, as turmoil and turnover increases, for more wrongful termination, compensation and raiding/recruiting disputes. Again, it’s too early for those claims.

Closed Cases and ATTs

We have been commenting, in past statistical analyses, on the shift in party preference for settlement (or aversion to decisions by arbitrators), especially in the customer sector. Overall, parties opted for an arbitral decision in 16% of the closed cases in 2019. In 2020, that trend continues at 16%, while, on the customer side, it dropped from an anemic 13% of the customer claimant matters in 2019 to 12% in the first quarter. In the first quarter, 1,004 cases closed versus 1,014 YOY, as compared to 2019. In the second quarter, the figures will be distorted by the moratorium on hearings at FINRA. We might expect fewer cases will tally as Closed Cases, as almost none will close by live hearing. Open cases should increase, as parties opt to wait for a hearing -- or put off settlement talks during this cool-down period. The pending docket currently stands at 4,781 and had been on a slight decline. Average turnaround times (ATTs) will be useless as a statistical indicator -- ATTs for Hearing Decisions and for settled cases will both be adversely affected by the moratorium, so look for the Overall ATT to extend even longer. It’s already up 16% from last year (15.6 mos. vs. 13.5 mos.).

(ed: *We reported in SAA 2020-15 (Apr. 22) that what we all knew as the “FINRA Office of Dispute Resolution,” would become “FINRA Dispute Resolution Services,” on May 4. We’ll report when the change becomes official. **The April stats should be revealing as to any potential Corona Crash case filings.) (SAC Ref. No. 2020-16-01)

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