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FINRA: Making Statistics Tell Us More About Securities Arbitration
Posted on Categories Arbitration, FINRA Task Force, News, Securities Arbitration, Statistics & SurveysTags , , , , , , ,

By Richard P. Ryder

INTRODUCTION

For many years now, the FINRA Office of Dispute Resolution has published monthly statistics about its arbitration and mediation operations. The reported data has offered current and historic information about case inflow and outflow, the types of allegations and securities behind customer disputes, the number of cases going to hearing and their proportion to the rest, the outcomes for customers, and the state of the neutral roster.

I follow the trends and developments reflected in these changing statistics and write a monthly column analyzing the figures provided by FINRA. We learn a lot from FINRA's Public Awards Program about arbitrator thinking and case dispositions; the published statistics on FINRA's operations tells us what is coming through the front of the dispute resolution pipeline, what is being currently processed and what we can learn from closed cases in the aggregate. So many of the tactical matters an arbitration practitioner will have to address during the life of a case with FINRA will be informed by the general knowledge available in these statistics.

Let me just give a few examples. FINRA reports data on average turnaround time, the percentage of settlements and the customer win rate. This data allows one to calculate the probability of a long or short wait for hearing, of going to hearing at all, of winning if one proceeds or of settling through mediation. You can even figure out from these statistics the probability that the settlement process will take as long as or longer than the route to hearing. If one is representing a customer, the client will want to know how long the process will take; the branch client on the defense side will want to know the amounts to budget, the likelihood of success and how your case fits into the averages.

Thus, the reported statistics not only afford the nervous and suspicious a sense of the transparency and impartiality of the forum; they also provide needed intelligence about the whole theater of activity and its relation to one's own skirmishes and legal battles. In 2016, FINRA-ODR upgraded and re-designed the monthly statistical report, adding features that enhance the sense of transparency and improving the tactical value of the data and its usefulness to counsel on both sides. This article describes and analyzes those changes and explains how the changes better prepare the arbitration practitioner to navigate her case through the shoals of arbitration.

IMPETUS FOR CHANGE

Among the 51 recommendations made by the Dispute Resolution Task Force in its December 2015 Report was the recommendation to enhance the information imparted to the public in the monthly statistics published by FINRA on the Office of Dispute Resolution's Website (www.finra.org/arbitration-and-mediation). The DRTF was tasked by the FINRA Board with coming up with ways to improve the transparency, integrity and efficiency of the FINRA forum. With regard to the monthly statistical report posted by FINRA-ODR on the organization's Website, DRTF had this to say on page 44 of the Report:

"Publication of Additional Information on FINRA’s Website. The task force considered a suggestion that additional statistical information be posted on FINRA’s website, specifically:

  • a. A roster breakdown of active arbitrators by hearing location,
  • b. Pending cases by hearing location,
  • c. Average Turnaround Time for closed cases by hearing location.

It was suggested that this information would be useful to parties to determine if there were particular bottlenecks or delays regarding arbitrations in particular locations and would also assist FINRA to determine where additional arbitrators may be needed for recruiting purposes."

The Task Force later withdrew the proposal to provide average turnaround times by hearing location, for reasons we can explore later in this article. Because this recommendation did not require rulemaking or major deliberation, the FINRA-ODR staff set to work on it immediately and incorporated these and numerous other changes into the monthly format -- and did so even before the DRTF Report was released. We'll next review some of those improvements and why they aid our understanding of the operations and procedures behind the arbitration process at FINRA.

BIG CHANGES TO THE FINRA-ODR REPORT

At the top of the new Report is a topical link list of ten choices that will take the viewer, without scrolling, to the place in the Report that interests them. The case-filing statistics that formerly gave a binary look at the new submissions (up; down) now break down new filings by those that are customer-related and those that are industry-related. Historically, intra-industry cases form about 30-40% of FINRA's open cases. Historically, too, the number of intra-industry cases from year-to-year remains quite stable. Customer cases account for much of the ebb and flow on the intake side. With this new division, one gets a more precise sense of tidal shifts. That information can be helpful to those handling customer claims, particularly. It can impact marketing and staffing decisions and, on a higher level, where to aim one's practice.

The new Report also collapses three prior charts on new filings, closed cases, and average turnaround times into one chart. In the past, we have often tried to judge where the pending docket at FINRA stood (ed: what’s in the pipeline?) through an aggregation of the new submissions figures with the accumulated closed-case figures. Now, FINRA just puts it out there. Comparable figures for the prior two years appear below the most current year's numbers. The pending number -- in FINRA parlance, the "open cases" -- tells users just how backlogged FINRA is, so one can anticipate either smooth sailing or a more protracted path ahead.

Having the average turnaround times (ATT) in the same chart allows confirmation of suspected backlogs and ATTs have fluctuated quite widely at FINRA over the years. These ATT figures revealed an apparent anomaly recently: In 2016, the ATT for all cases closed has been going up (i.e., worsening), while, measured separately, the ATTs for decided cases (Hearing Decisions and Simplified Decisions) have been going down (i.e., improving). Decided cases account for only about 20-25% of dispositions and most of the rest are settlements. That the overall average would be rising, while the decided averages are decreasing, indicates that the time to settlement is getting closer to the commencement of hearings.

For customer claimants, in particular, such a development, if verified, reduces the virtues of settling, versus taking the risk of a hearing decision. Generally, customer claimants pay on contingency, so the hearing costs are much diminished from what the defense must absorb. The threat of hearing, though, carries with it the stress of the process itself, but, most importantly, the risk of a total loss. The FINRA Report advises that only 14% of customers are trusting to the wisdom of arbitrators today, as compared to 20% of parties overall. That's not good news, no matter what the reason (and we can think of four or five), but the data provide the key to discovering the possible explanations and expose the need to inquire.

Whereas, FINRA reports in the past have supplied per-item charts offering statistics for a particular topic, FINRA-ODR has now juxtaposed the charts to show the interrelationship of one statistic to another. For instance, the historical (2001-2017) chart of cases filed and cases closed, previously separate, are now presented together. One can see, at a glance, the buildup in case filings after the Tech-Wreck, as the Millennium began and, again, in 2008 and 2009 with the financial crisis. Parallel to those figures are the closed-case figures, which struggled during the years of heavy volume and caught up in years of slackening volume. In 2014-2016, with several straight years of stable and historically low volume, the closed cases are running in parallel with new matters.

Controversies and Security Types: Customers

The Controversy (allegations) and Security Type (product) Charts have also been revamped, so that more items (15 vs. 10 or 11) are presented, and they are presented in order of numerical importance. One can now easily discern that “Breach of Fiduciary Duty” claims dominate the “Controversy” chart, followed by “Negligence” and “Failure to Supervise." The new “claims” on the Chart are “Violations of Blue Sky Laws,” “Manipulation,” “Errors-Charges” and “Fraud.” In January 2017, the FINRA Report reveals a doubling of blue sky claims (50 vs. 21 in January 2016) and big increases in claims of fraud and omission of facts.

On the product side, the Chart for "Security Types" now shows "Common Stocks," "Mutual Funds" and “Municipal Bonds” at the top of the Chart. Mutual Funds regained second position after trailing Municipal Bonds for three years. We could not see the impact of the Puerto Rico bond fund cases on FINRA’s product chart in the past. Now it is plain! In addition to the previous category, Municipal Bond Funds have occupied a more prominent position, but is now also slipping. Additional new categories in the early phase were “Real Estate Investment Trust (REITs),” “Exchange-Traded Funds,” “Private Equities” and “Structured Products.” Now, we see, instead or in addition, "Unit Investment Trust" and " 401(k)," Perhaps, FINRA is following trends here, too, as there were 27 "401(k)" cases for all of 2016, while 8 were filed in January alone. Unit Investment Trust claims numbered 4 in January, but up from 3 all of last year.

Controversies: Intra-Industry

The new Report opens a whole new dimension in reporting with the inclusion of a “Controversy” chart for Intra-Industry Arbitrations. All-new are the 15 categories of disputes, running from "Breach of Contract" and “Promissory Notes” at the top to “Compensation” disputes in the third slot and “Raiding Disputes,” a small, but important group (32), as we move to the bottom. Raiding Disputes are down dramatically; one can see this confirmed in the "Transfer" category on the customer "Controversies" list, which is also drying up. One might think that "Defamation" claims would be dropping, if brokers are staying put, but that's not the case. Both the Form U5 category of defamation claim and the "other" category are rising and have been in recent years. "Discrimination" claims, another important intra-industry category, are far fewer in number than Defamation and "Compensation" claims, and have remained relatively stable in number.

Big Change: Arbitrators by Hearing Location

Perhaps, the most significant change to the new statistical Report -- certainly the most colorful -- is the addition of an interactive map of the United States, with each hearing location on the map embedded with information about the number of pending cases and the arbitrators available for service in that specific hearing location. In the text above the map, the words "table format" link the user to a chart that provides the same information, but for all hearing locations in alpha order. This chart makes it easier to compare numerous hearing locations and it can be saved as a PDF, enabling month-to-month comparisons by return visitors, like ourselves.

The Table lists each hearing location, the number of cases pending in that location (updated monthly), and the number of Public Arbitrators, Non-Public Arbitrators, and Public Chairs. FINRA basically gave the DRTF everything it asked for. Those contemplating bringing a claim that will be heard by arbitrators in Albany, NY will easily see that this situs has ample arbitrator capacity in all classifications and that only seven cases will be competing for those resources. FINRA did not supply the average turnaround time for Albany in this new listing, as the DRTF originally asked. The staff did not need the information for its own needs (identifying trouble spots and recruitment deficiencies). The Task Force withdrew the recommendation, saying it "did not see any data suggesting that certain districts were more delayed than others in their ability to facilitate arbitration cases." The Report also notes that "hearing locations are generally determined by the residence of the claimant, unless otherwise agreed to by the parties."

Recommendations: Hearing Location

Parties can agree on a change in hearing location, if the available information suggests it would be practical. What the new hearing location list does not tell the user considering Albany is that, in the past three years, five cases have been decided in that situs with an ATT of 953 days! The ATT for Hearing Decisions is currently at an enviable low of 13.7 months (about 400 days), but, for reasons that do not appear to be affected by ample arbitrator capacity, Albany has a bottleneck. If the customer considering Albany resided there when the claim arose, but now lives in California, where the Respondent broker-dealer is also based, ATT data for Albany, Los Angeles (572 days) and San Francisco (619 days) could be material in persuading the parties to agree mutually on a situs change.

A further modification we think prudent and helpful was not one the Task Force was able to consider. FINRA apparently lists the number of arbitrators available for service in the hearing location, as opposed to the number who were originally admitted or who reside there. We say this, only because, when one adds up the listed arbitrators, the number equals far more than the 7,000 arbitrators on the FINRA Neutral Roster. While the number of available arbitrators seems the correct figure for purposes of weighing bottleneck potentials, many practitioners, particularly on the Claimant side, do not like the use of "itinerant" or "traveling" arbitrators.

In a comment letter, submitted by PIABA to the SEC in 2016, in connection with a rule proposal on chairperson eligibility (SR-FINRA-2016-033), then-President Hugh Berkson wrote: “PIABA does not want to see the quality of the pools watered down or have an increase in ‘traveling arbitrators’ to attain a greater number of chair-qualified arbitrators.” PIABA members are encountering the same out-of-state arbitrators more frequently, he wrote, and the problem is exacerbated in the small and mid-size hearing locations. Besides causing delays, out-of-state arbitrators may have lower “win” rates than local chairpersons, he claimed. The delays relate to the need for traveling arbitrators to adhere to a travel schedule, to the delays that result from traveling, and the difficulties of scheduling back-to-back hearing days.

Conclusion

Practitioners would be greatly aided, we think, were FINRA to supply two more columns on the "Hearing Location Statistics" chart: one for average turnaround time for past Awards in the specific hearing locations; and, another for the number of "traveling" arbitrators who have the relevant hearing location as their secondary base. As for other recommendations, we have some, but FINRA has truly amplified the utility and transparency of its statistical reports with the changes it has already undertaken. Further change and continued improvement lie ahead, one can tell from FINRA's open approach on this subject. The information already available provides much data for refining observations, polishing probabilities, and making more informed judgments in one's arbitration practice.

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