Seven Things You Should Know About the 2023 FINRA Stats Report
Posted on Categories Arbitration, Arbitration Awards, Feature Article, Statistics & SurveysTags , , , ,

by Richard P. Ryder*

FINRA’s Dispute Resolution Services (“FINRA-DR”) issued its December (and year-end 2023) statistical report in late January. Here’s the link to find the report. Our purpose here is to analyze that report with a view to making observations about the process, the forum, and future caseloads.

The article employs the editorial “we,” but the views expressed about the report are mine alone. We use the statistics to project, surmise and predict, none of which is far from being an opinion, so a disclaimer seems appropriate when one rakes over the statistical “coals” that remain from this past year’s program. “We” have engaged in that process and are prepared to shift from the raking phase to shoveling. With that said, here are our primary takeaways from our review — first in summary and then in detail.

  1. Case filings grew dramatically in 2023 in both the intra-industry and customer-related categories.
  2. Industry claims acted as the primary driver of the growth and the stand-out claims were promissory-note and expungement-relief claims.
  3. Customer claims have not changed much in their nature, but a shift in the type of products involved in the disputes suggests a change in case complexion.
  4. Closed-case and turnaround-time statistics expose the impact that expungement cases are having on the forum’s program.
  5. FINRA-DR properly focuses special attention in its reports on customer Award outcomes and the statistical results provided help to shape tactics and presentations.
  6. The mediation program may appear stressed in a quick review of the statistics, but a deeper analysis reveals the mediation process’ important role in today’s arbitration practice.
  7. FINRA’s terrific success in recruiting more arbitrators, particularly public arbitrators, prepares the program to handle a huge surge in cases, should it come.

Not one statistic appears in the above summary statements, but plenty of detail and supporting numbers follow below. The full-text analysis permits us to provide reasons and support for our observations and conclusions.

  1. Case filings at the FINRA Dispute Resolution Services unit grew dramatically in 2023; still, the bounce came off the lowest annual reading in this millennium.

A rise in new cases filed was the pattern throughout 2023; indeed, increased strength in case inflow can be traced back to the final quarter of 2022. For the full year 2023, 3,392 new cases were reported: 1,891 customer cases and 1,491 industry cases. That represented a 27% increase over the total of 2,671 new claims for 2022: a rise in customer claims of 12%; and a rise in industry claims of 52%.

Does that mean a continued upturn is underway? Quite the opposite in our view. For perspective on the subject, it helps to know that last year’s total of 2,671 new claims constituted the lowest annual intake in the new Millennium. The 3,392 total achieved in 2023 is the third smallest since 2006. Besides 2022, there was the 2007 slump (3,238 claims). That came just ahead of the “Great Recession” and the subprime mortgage crisis; by 2009, total claims received for the year ballooned to 7,137.

So, a financial crisis could mean a burst in new filings for 2024. The market certainly appears in an over-bought condition as we write — but we’re fairly certain that the rise in customer cases of 12% for 2023 does not constitute a forecast of that possibility. The additional 700 cases recorded in 2023 were submitted mostly on the industry side; only 200 more customer matters were recorded. What we saw was more likely a recovery of sorts from the stultifying doldrums of the past two Pandemic years.

  1. New industry claims were the primary driver of the growth in new cases in 2023. They rose 52% from the 2022 industry total of 978. Promissory note disputes and requests for expungement relief led the way.

There was a point during the past year when newly filed industry claims were up 72%, in comparison to the numbers from 2022. By the end of the year, that growth still stood at a robust 52% increase — and the 1,491 new industry cases, as a percentage of the whole (44%), looked to rival the customer side. But, was this surge a sign of huge intra-industry unrest or, perhaps, the presage of a rising paradigm shift?

Again, we think not. Certainly, a review of the top industry “controversy types” in the FINRA report reflect growth, when compared to the past two years. “Breach of Contract” claims totaled 294 last year, versus 225 in 2022 and 268 in 2021. Defamation claims, whether related to Form U-5 comments or not, rose to 195 new claims from 153 in 2022 and 148 in 2021. Wrongful termination claims were also up: 66 versus 50 and 62 in the two prior years, respectively. But, those controversy types that declined in number, in year-to-year comparisons, tell the real story.

What those categories suggest is a relative equanimity within the industry. Disputes over “Commissions” and “Compensation” generally were down from prior years; ditto for “Discrimination or Harassment” claims. Broker transfer disputes, according to Investment News, drew to a relative standstill; one can see that in the “Raiding Disputes” category of claims, which stood fast at 24. Brokers were staying put, too, and broker-dealers were focused on nurturing talent from within, as opposed to poaching from the competition.

So, “where’s the beef”? The only “Controversy Type” in the FINRA report that moved up dramatically was that labeled “Promissory Note” disputes — it jumped from 84 in 2022 to 154 in 2023. Now, these disputes quite often generate either counterclaims or preemptive claims relating to defamation, discrimination and wrongful termination, so the rise in these bad debt disputes may account for increases in related categories. In any case, those numbers do not explain the surge we observed in industry claims for all of 2023.

We think the real answer lies beyond the listed “Controversy Types.” While FINRA-DR routinely lists the 15 top most active “controversy types” in its reports, the facility, for some reason, does not include “expungement” cases in that listing — perhaps, because requests for expungement relief are not controversies. One can tell that a large piece of the industry story is missing, when reviewing the “Controversy Types” chart, because there are not even enough examples of the 15 types, when added together, to equal the total number of industry claims recorded. Again, there were 1,491 new industry cases and we count only 924 “controversy types” in the industry chart. In contrast, the customer “controversy type“ chart records more than 10,000 claims that relate to the 15 categories listed. Clearly, a significant source of industry disputes is not reflected in the picture cast by a review of the industry “controversy types.” A big part of that iceberg lay beneath the surface.

How are we sure it’s expungement disputes? Here, we refer to the monthly statistics reported regularly in the relevant weekly editions of the Alert.  In SAA 2023-46, when reporting on the October 2023 statistical report, your editor notes that the remarkable filing total of 486 in October has brought total claims to 2,929 and industry claims, as a major part of that whole, to an historical parity with customer claims. In September, the total new claims tally was 262 and, as it turned out, the next two months (November and December) would split just 453 more claims.

What happened in October? The new and generally more restrictive expungement procedures contained in existing Rule 12800 and new Rules 12805 and 13805 took effect; Concerned attorneys and brokers, for a long time, have been anticipating the implementation of stricter rules of play in the expungement game and hastened filings have been boosting the case numbers at FINRA-DR. October 15, 2023 was the last chance to file “under the wire” and, clearly, a lot of folks did.

  1. Inflowing customer claims rose 12% versus the 2022 results. Breach of Reg BI stands out on the controversy side, while a product shift bespeaks new sources of customer losses.

As we did for intra-industry claims, we looked to the “Controversy Types” Charts in the FINRA report for clues - this time, on the customer side. We saw few substantial changes, when comparing last year’s numbers to those of the preceding five years presented; just two exceeded 12% growth from last year. Breach of Fiduciary Duty claims were ubiquitous and topped the Chart. appearing in 1,518 of the 1,891 new cases (vs. 1,340 in 2022, a 13% increase). Breach of Regulation BI claims , first appearing on the Chart in 2022, go hand-in-hand with fiduciary duty claims, and they blossomed from 216 claims in 2022 to 408 this past year.

Negligence and Suitability claims advanced somewhat, but the greater growth surfaced, somewhat surprisingly, when examining the intentional torts. These claims, such as Churning, Unauthorized Trading, and Elder Abuse were all up by 12% or more. “Unauthorized Trading” and the more amorphous “Errors-Charges” controversy types stood out as far more active. While not accounting for a large percentage of the total claims, “Unauthorized Trading” reflected 175 claims for 2023, versus 149 in 2022 (17%), and “Errors-Charges” drew 132 claims versus 99, respectively (33%).

Overall, these claim types, while possibly reflective of compliance and control issues, would be more generally alarming, if accompanied by a rise in margin call disputes — but that phenomenon is not apparent. “Margin Calls” as a “Controversy Type” appears in the top 15 of the customer Chart at times, but not in this report. Overall margin statistics, i.e., dollar totals for debit balances in margin accounts, are historically high right now — in the $700 billion range, as reported by FINRA through January 2024, but  they do not yet appear to be fomenting controversies.

Debit balances were even higher in the recent past, reaching an all-time high of $936 billion in October 2021. That bubble subsided and the current swelling in the credit ranks began at the end of 2022. Since December of 2022, margin debit balances have grown by about $100 billion. Interestingly, much of that debt was taken on in somewhat volatile, but ultimately neutral markets; the current march upward in equity markets to historic highs — some 6,500 points on the Dow — dates from late October 2023.

No review of the source of customer claims can be complete without reference to the types of products implicated in, and at the heart of, the dispute. Even if the product is not itself the cause of problems, it’s still where the money is. Judging from FINRA’s 2023 year-end report, we observe a shift in product emphasis from 2022, away from alternative and often more speculative investments, such as REITs (197 v. 211), Options (121 v. 153), Private Equities (120 v. 146), Limited Partnerships (68 v. 122) and Business Development Companies (45 v. 88). Rather, the problems that resulted in customer claims in 2023 emanated from investments in more traditional and yield-oriented instruments, such as Mutual Funds (294 v. 159), ETFs (95 v. 60), Variable/Fixed Annuities (159 v. 105), Municipal Bond Funds (75 v. 50), and Preferred Stock (73 v. 42). Corporate Bonds stayed about the same at 236 (239 in 2022), but those numbers dwarf the years prior (59, 79 and 74, respectively). This perceived shift to more risk-off, liquid investments may result from the rapid rise in interest rates over the past two years. It suggests to us a somewhat safer — at least more familiar — environment for the current investor.

4. The number of cases closed by the DR facility hit a new low of 3,027; additionally, those that closed did so in an efficient manner, shaving almost 4 months off overall case turnaround times.

At 3,027, the number of cases closed by FINRA-DR during 2023 hit a new low. With the exception of 2015 (3,489), this past year’s closed-case total and that of the year before (3,564 in 2022) are the smallest lot of concluded matters in any year since 2006. We judge that the modest performance relates more to a sparse inventory than to lack of zeal. A robust facility needs to sustain a reliable caseload to function optimally. It may be that the staff will attend more to each matter, when there are fewer cases to tend; but, ultimately, fewer fees, less work for arbitrators, and reduced investment in improvements will have a pervasive impact on the program. That is not the FINRA of today, in our view, but it is a caution.

Another aspect of this concluded-case group of 3,027 matters that begs examination — they concluded faster. Overall turnaround times dropped from 18.3 months on average in 2022 to 14.6 in 2023. Regular hearing decisions concluded in 17.3 months as a group, versus an average 19.8 months in 2022. Efficiency and more careful shepherding of cases may account partially for the four-month reduction in overall case turnaround times. Surely, though, another factor in the mix must be the plethora of expungement cases that were on the FINRA-DR case docket and were processed to conclusion in 2023 (SAC’s Award Database found 422 such Awards).

Requests for expungement relief are often unopposed, contend with a single issue, and generally require testimony from only a few witnesses. Our finding, from a scan of the “straight-in” expungement Awards issued in 2023, is that they commonly conclude in a year’s time, even less. That means the expungement cases will remain a large part of the FINRA docket through most of 2024. They won’t settle; by their nature, a hearing and a decision of the arbitrator(s) are needed, so they will continue to affect close-out and turnaround-time statistics in a major way in the short-term and less so in the longer-term. Their impact on case filing statistics will become more apparent, now that many of the older claims for relief have been processed and the new expungement regime has been set in place.

  1. Over time, and for reasons that will differ from one securities arbitration pundit to the next, arbitration wins are decidedly less common, percentage-wise, but those percentages reveal much about the process that FINRA practitioners can learn.

Despite decisions by arbitrators constituting only 15-18% of the cases closed, FINRA-DR rightly recognizes these Awards as the most significant sector under its administrative care. One’s appearance before the arbitrators is a realization of that promised “day in court,” the final event that hopelessly separated disputants have prepared for. It’s where FINRA arbitrators meet the challenge of fairness and where the quest for truth finds full focus. FINRA-DR’s statistical report recognizes this primary significance by providing the most detailed disclosures regarding customer outcomes in a variety of presentation formats.

Awards represent the tribunal’s final verdict on an arbitration matter and FINRA parses these outcomes by testing how often the customer claimant wins and whether the vehicle to decision was reached through regular hearings, special proceedings (mostly telephonic), or by a review of the documents (paper cases). Taken together, these customer-initiated Awards numbered 274 in 2023. That’s only 9% of all cases closed by the facility; it’s 14% of the customer cases closed. We can project, although the report does not indicate, that about 1,957 customer cases were included among the 3,027 cases closed in 2023. Of the 274 Awards, a mere 67 resulted in an award of damages to the customer (24%).

It does not take a bias in favor of the claiming customer to consider that statistic troubling. In 2019 and in earlier years, the win rate for customers was generally 40% or higher. Such a low win rate as 24% generates a variety of reactions: Is arbitration fair for the customer? Has the long and steady rise of the securities markets since 2009 affected panelists’ thinking about investors’ grievances? Is the low rate a product of settling all of the claim-worthy matters, leaving a group of cases quite distinctive in character from those that were resolved by negotiation?

Is there one form of presentation format where the claimant does especially well or poorly? FINRA-DR provides the charts to address that latter question. Those customer claimants that travel the most prevalent route and choose a regular hearing before a panel of arbitrators do better than the average. 200 of the 274 matters took this path and claimants in 59 of the cases were awarded damages by the arbitrators (note: that leaves only 8 other winners!). That 30% win rate is further dissected by analyzing 144 of the 200 cases broken into two sub-sets: those with one or more Zoom evidentiary hearings, where claimants achieved a 40% win rate (21/53 matters); and those with in-person evidentiary hearings, where claimants achieved a 37% win rate (34/91).

The small-dollar claims are separately addressed in charts presenting results in special proceeding hearings and in small claims matters, decided on the papers. Five years of Award results for the special proceeding cases paints a dismal picture for claimants. Four of the five years project win rates of 20% or under and, in 2023, 15 cases produced no winners at all (0% win rate)! Seven years of results for “paper cases” reflect a more varied outcome for the 55 to 85 cases decided annually by document review, with a win-rate range between 14% and 48% for customers. Only 8 of 59 customer claimants won any damages in 2023 — 2023 is the 14% year!

Many of the regular hearing cases are decided by three-person panels and that provides a final opportunity to distinguish statistically among the choices available to customers. Parties proceeding before mixed panels, where one of the arbitrators is deemed “non-public,” have foregone the customer claimant’s privilege of striking all of the non-public arbitrators. Of the 168 cases where this choice was available, 122 of the cases were decided by all-public panels and 46 by majority public panels; the win rate with the former was 32% for claimants and, with the latter, 26%. Of the seven years charted, win rates with the all-public panel were substantially higher in all years except 2018.

So, there you have it! Attorneys representing customer-claimants following this statistical guidance will want to position themselves with a regular hearing panel, seek at least one virtual hearing session, and strike all non-public candidates during arbitrator selection.  Of course, there are 17 chances out of 20 that you will not have to risk an arbitral decision, but having the right panel will help in a variety of ways during pre-hearing preparation, mediation and direct negotiations. Actually, to be serious, we see in these statistics the value of taking time and expending efforts to prepare painstakingly, to vet panels diligently, and to familiarize oneself with the rules, practices and tactics available.

  1. On the face of it, mediation statistics reflected a softening of interest in the process, but we continue to believe that mediation interest remains strong and, doing a deeper dive, disclose the statistics to support that belief.

Perhaps, the toughest numbers to parse for knowledge and insight are the mediation numbers FINRA provides each month.  That may be because so much of the activity lies outside the FINRA forum. For instance, looking at the new “Cases in Agreement” figure for 2023, one might conclude that it bespeaks a dwindling of interest in mediation. After all, the 637 new cases trail the prior year’s 746 “cases in Agreement” and the number of claims filed were fewer in 2022 than 2023. One might reasonably expect growth in the “Cases in Agreement” column. Countering that surmise, however, would be the 217 requests for mediation from 2023 “could-be” disputants. Their conflicts are characterized as “pre-arbitration.” These parties are not even in the system yet and at least one party is seeking mediation assistance. There were only 167 requests of that nature in 2022. Moreover, 80 of the requests (37%) were met with agreement in the past year, whereas, in, 2022, only 21% of the requests, or 40 contra-parties, responded with an agreement to mediate.

In the same vein, direct settlement negotiations between the parties were supplemented by settlements via mediation, so that the percentage settled via mediation has grown from a traditional 11-13% of the closed cases in the last two years to 20% in 2022 and 16% in 2023. From what one gathers anecdotally, mediation has never been more utilized by arbitrating parties. Indeed, one hears that mediation is an integral part of virtually all serious-money cases. It is expected, as an accepted phase in the process, and, whether it ends the case or not, it generally advances the “ball in that direction.” If nothing else, the process of mediation itself holds advantages for both parties as helpful preparation for the hearing.

  1. FINRA’s terrific success in recruiting more arbitrators, particularly public arbitrators, prepares the program to handle a huge surge in cases, should it come.

While there are two public arbitrator seats on the larger-dollar cases at the FINRA forum, and one non-public arbitrator seat, the non-public arbitrator seat can be filled by a public arbitrator. That actually happens in most cases, judging by the Award statistics. In 2023, 122 cases were heard and decided by panels composed of three public arbitrators; a non-public arbitrator held a seat at the panel table in 46 of the cases. Thus, in just 27% of the larger customer cases does the non-public arbitrator have a chance to be appointed. In cases involving only one arbitrator, the non-public arbitrator plays no role whatsoever.

On the employment side, there was a time when the industry or non-public arbitrator occupied two of the three seats on a tripartite panel, but, today, only one seat is designated for that group.  Today’s status quo came about through a series of rule changes that tightened the definition of public arbitrator and rendered the non-public group residual in character.  With these rule changes, the need for a much larger roster of public arbitrators became a priority at FINRA-DR and the staff rose to the occasion with a large-scale recruiting effort. Diversity among the newly recruited arbitrators was also a high priority and there, too, substantial progress has been made.

FINRA has added more than 1,000 new public arbitrators to the Neutral Roster in less than a decade. That’s a net of 1,000, we emphasize, because arbitrator ranks are subject, as are all communities of people, to natural attrition by death, resignation and disqualification. In 2015, 3,009 public arbitrators appeared on the roster, while today, FINRA lists 4,071. In 2015, FINRA’s roster contained only 6,618 names in total; at year-end 2023, that number had risen to 8,251. More than half (53%) of the arbitrators today are 60 years of age or younger, thus enhancing the potential time new recruits will serve on the roster.

Today, 45% of the roster is comprised of female arbitrators; it was not long ago when half of that percentage served. Whether these women are not only included by the forum as arbitrators, but whether they are also accepted for service by the parties, forms the next question. After all, experience on panels is the best learning opportunity. To address the issue of service, we surveyed SAC’s Award Database, viewing 131 Customer-Member Awards from the last half of 2023, and found the following: Female arbitrators formed part of a panel in all but 34 cases; in five of the matters, the three-person panel was entirely female. Among the few cases warranting only a single arbitrator, six cases were decided by a sole female arbitrator. Among the tripartite panels in toto, 239 men had a seat on the panel and 112 women were appointed to serve.

Importantly, FINRA-DR has ensured it will be ready to administer competently, by dint of this recruiting effort, should a flood of new cases arise. Initial training requirements, educational guides and additional materials on the FINRA Website aid the newly appointed arbitrator and continuing education requirements guarantee regular updating of one’s skills and procedural familiarity. It is in the interest of all constituents of the process that these new recruits are also getting the clinical experience of active service.

Conclusion

FINRA’s online collection of year-end statistical reports reaches back to 2012. That dozen years of arbitration data allows one to check perceptions and trends. It corrects the myths and misconceptions that arise with ad hoc observations and refreshes our tactical thinking about the process. When we were covering the subject of arbitrator recruitment and changes in the Neutral Roster over time, our clear recollections had it that the number of non-public arbitrators has consistently been larger than the number of public arbitrators, until recently turned about by FINRA’s recruiting efforts. We also recalled that, a decade ago , the roster total for all arbitrators fell between 4,000 and 5,000. When we charted all of the figures from the annual reports, it turned out that 6,300 was the lowest total figure (2014), that the tallies for non-public vs. public arbitrators tilted to the non-public side in 2014, but, before that, the number of public arbitrators was substantially higher than the non-public tally. Memory fails where accurate data is at hand.

This exercise also drew me back into an examination of the process and reminded me that the primary mission of the Dispute Resolution facility is to provide redress for customers. The very high settlement rate, party reliance on mediation, the influence of expungement proceedings on the forum’s resources and practices, are dynamic outgrowths of a simpler imperative — the quest to provide a path to resolution through a binding decision that finally determines the equities of one’s dispute. The parties may choose to settle, they may negotiate a satisfactory outcome, but the role of the forum is to provide qualified decision makers, to set a path for hearing, to move the dispute steadfastly toward a speedy decision, and to reach finality in terms of outcome and payment. We see this underlying objective so clearly in threading our way through the charts and figures disclosed in the FINRA statistical reports.


*Rick Ryder is a member of the Alert’s Board of Editors and the founder of Securities Arbitration Commentator, Inc. SAC, Inc. owns and operates the SAC Award Database and the online com arbitrator search facility. He is also the former Editor and creator of the paper newsletter and online email service that this publication so ably succeeds.