Financial Advisor (May 18, 2020) - While Finra arbitration filings have already risen 14% this year, that is just the tip of the iceberg of customer cases the industry can expect as fallout from the pandemic, according to a securities industry defense attorney working with firms on preventative measures.
Daniel Hetzel, a partner in the financial services and regulatory practice group at Kaufman Dolowich & Voluck, told Financial Advisor that he is tracking client solicitations from investor attorneys and expects arbitration increases to track the trajectory they took after the 2008 market crash when the number of filings doubled.
“Right now, investors are still dealing with external challenges, but when that settles down, I’d expect to see a significant increase in arbitration filings,” said Hetzel, who has been a defense attorney for broker-dealers and the securities industry for 20 years. “Any time there is a market downturn, PIABA [Public Investor Advocate Bar Association] attorneys start soliciting clients."
Arbitration filings have increased 14% through March, from the 3,757 filings during the same period last year, according to Finra. Hetzel said he’d expect filings to continue to climb like they did after the 2007-2008 crisis, when they jumped from 3,238 in 2007 to 7,137 in 2009.
“At this point, conditions are ripe for the filing of customer claims in Finra arbitration. Customers may have lost their jobs or small businesses and may now find themselves in a financial situation which would have been unthinkable less than two months ago. Customers may feel emotional about their losses and may ultimately vent their frustrations upon their registered representatives and broker-dealer,” Hetzel added.
The fact that more of these claims have not already been filed “simply reflects how quickly things have happened with the Covid-19 crisis and the time it takes for these types of claims to actually get filed,” he said.
Investor attorneys are soliciting investor disputes for a host of claims, including general market losses based on the idea that the decline in equities markets as a result of the Covid-19 crisis was somehow “foreseeable” and that fears over the virus had been “public” for several months before markets crashed, Hetzel said.
“These claims strike us as rather dubious and it is very difficult to predict what will happen with markets over the next month or two. We have not seen these types of pure market loss claims in a long time due to strong markets, but we do anticipate that these types of claims will start being filed,” he added.
PIABA attorneys are also trying to pitch related claims that it was reasonable for customers to expect their financial advisor to have taken measures to protect their portfolio, especially with elderly customers or with portfolios that had concentrations in certain sectors of the economy, he said.
“We have been working closely with our broker-dealer clients to discuss steps that can be taken to mitigate litigation risk and prevent meritless customer cases from getting filed in the first place,” said Hetzel, who suggested that firms proactively reach out to clients to assess their needs and rebalance their portfolios.
Hetzel said he is also seeing solicitations for investor losses in oil and gas investments—and expects to see claims that the recent decline in oil and gas prices was also “foreseeable.”
“We do expect Finra claims to be filed over the next month or two regarding oil and gas investments as the fall-out from the Covid-19 crisis continues to exacerbate pre-existing supply and demand problems in the oil and gas sector,” Hetzel said.
The veteran defense attorney is also expecting to see an increase in arbitration filings regarding non-traded REITs (real estate investment trusts) and other illiquid investments.
“We do anticipate that more claims will be filed over illiquid investments—and regardless of whether these investments have actually declined in value, investors who have lost their jobs or small businesses may have a sudden and unanticipated need for these funds and may be frustrated when reminded that these funds are illiquid,” Hetzel said.
PIABA attorneys are also trying to “opportunistically” assert claims regarding the use of margin in customer accounts; failure to execute claims; failure to supervise claims; and related claims that broker-dealers did not have effective business continuity plans (BCPs) in place, Hetzel added.