From Ulmer’s Broker-Dealer Law Corner Blog
By Alan M. Wolper
I read an article this week in Investment News with the following headline: “Brokerage Customers Winning More FINRA Arbitration Cases.” As a guy who defends customer cases, I was naturally intriguied by this. According to the article, “brokerage customers who do file claims against their registered representative or firm are faring better in the process this year. So far in 2019, 176 cases have been decided, and 44%, or 78 cases, resulted in the customer being awarded damages. That’s an uptick compared to recent history.” Wow, I thought, this could be a troubling trend.
But, then I looked at the statistics that FINRA Dispute Resolution publishes, and quickly realized that this headline, and this story, oversells the point in a big way.
The story correctly reports that customers have been awarded money in 44% of cases that went to hearing this year, and that this reflects an upwards trend. But, really, it’s hardly a significant increase. The percent of cases that result in something being awarded to customers look like this since 2014:
As you can see, there’s not much difference from year-to-year. And, when you consider that the average over this entire time period works out to 41.333%, it is clear that there is nothing momentous about the 44% figure we see year-to-date in 2019.
This conclusion becomes even more evident if we look at the data only from “regular” hearings – i.e., excluding the 35 “paper-only” cases and the four “special” hearings – rather than the overall data. When you do that, we see that the upward trend is even smaller; indeed, it is barely there at all:
Compared to the average over these six years – 43.333% — the 44% figure from 2019 simply does not serve as the basis to conclude what the headline in Investment News touts.
There is, however, something newsworthy in the FINRA statistics, although you won’t find the PIABA lawyers quoted in the Investment News article talking about it publicly. It is this: the impact of allowing claimants to insist that their cases be heard by “all-public” panels has become palpable and undeniable. The following chart compares the percent of cases that result in the customer being awarded something when the panel was comprised of three public arbitrators versus a panel comprised of two public members and an industry member:
All Public Panel 2 Public/1 Industry Panel
2014: 44% 38%
2015: 47% 45%
2016: 43% 36%
2017: 48% 37%
2018: 42% 47%
2019: 55% 29%
These data make it clear that that all-public panels have always given away money more frequently than “standard” panels, but just look at the 2019 data! The difference now between the two types of panels has become absurd. Indeed, based on these statistics, a customer this year has nearly a 100% better chance of receiving an award using an all-public panel than a “standard” panel. No wonder PIABA fought so hard to get FINRA to make this change back in 2011…and how sad that FINRA caved so easily.
When FINRA proposed the rule that permits a customer to insist on an all-public panel, it stated in the SEC filing that it “believes that providing customers with choice on the issue of including a non-public arbitrator on the panel deciding their case will enhance customers’ perception of the fairness of our rules and of the FINRA securities arbitration process.” This is crap. For PIABA and the customers its members represent, fairness is only dictated by the outcome of a case, not the process by which the case is administered. For them, all-public panels are more fair because they award money more freely than “standard” panels. That is a flawed, but utterly predictable, analysis. And, as I said, certainly one you won’t hear from PIABA.
As for FINRA, which, as is standard for that entity, is more concerned with “perceptions” rather than reality, it could care less how this rule change has impacted the broker-dealers that comprise its membership.