Financial Advisor IQ (May 12, 2020) - Pre-pandemic 2020 was shaping up as an unremarkable year for Finra arbitration disputes between clients and broker-dealers, according to the most recent statistics from the self-regulator.
Finra arbitration statistics, tabulated through March, show 493 case filings in the first quarter of this year, or nearly flat compared to 491 in the first quarter of 2019. The Finra statistics also show fewer filings in nine of the top 15 types of customer disputes filed in the first quarter year over year, and more filings in the other six.
Lawyers representing both customers and broker-dealers and their representatives forecast an uptick in customer disputes in Finra arbitration in the coming months in the wake of mounting investor losses due to stock market volatility.
“We will see a very large uptick of cases in the second and third quarter of this year,” predicts Andrew Stoltmann, a Chicago-based lawyer who is also a past president of the Public Investors Advocate Bar Association.
“There is typically a two- to six-month lead time before you see a big surge of cases after the market crashes. Clients are still getting their monthly and quarterly statements and sometimes they don’t check them for a period of time. If this market stays down, we will see a massive surge in cases in the middle to later part of this year,” Stoltmann adds.
Bradley Bennett, a lawyer who served as Finra's chief of enforcement from 2011 to 2017, expects plaintiff lawyers to act strategically.
“They will be smart on case intake,” he predicts, adding plaintiff lawyers will likely initially take on cases in which significant investment suitability issues exist.
Broker-dealers likely will pin their defenses on the global Covid-19 pandemic, Bennett says, arguing it represents a once-in-a-century event with consequences nobody could predict or control.
Marnie Lambert agrees with the projected uptick. “I absolutely expect there to be an increase in Finra customer case filings in the next few months,” says Lambert, a Columbus, Ohio-based lawyer who also serves on the Piaba board.
“A long-lasting bull market can hide a lot of really bad investment advice. Volatility brings that bad advice to light. Once people are focused on more than just their health and livelihood, and life takes on some semblance of the new normal, I would be shocked if we don’t see an influx of new Finra customer case filings,” Lambert adds.
“It’s not if,” an uptick will occur, "but when,” says Jacob Frenkel, an attorney with and member of Washington, D.C.-based law firm Dickinson Wright, and the chair of its government investigations and securities enforcement practice. Frenkel represents both broker-dealers and customers.
“Regardless of market forces and merit of the claims, investors tend to try to hold responsible their reps and the firms for losses,” Frenkel says.
“The real exposure for broker-dealers will focus on failed efforts to help clients trade aggressively in this volatile market. Priority one right now for the firms should be strict compliance oversight, because the firms will want to position themselves at least to minimize liability exposure,” he adds.
“My emphasis with broker-dealer clients is thoughtful planning, in large part to help reduce substantially the defense costs for inevitable claims and inquiries,” Frenkel says.
Finra’s arbitration and mediation forum is the largest securities dispute resolution venue in the U.S. The forum says it handles more than 99% of the securities-related cases in the U.S. It has a roster of nearly 8,000 arbitrators and hearing locations in all 50 states as well as Puerto Rico and London.