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FINRA Stats, 2014
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FINRA Dispute Resolution has released its final monthly report on this past year; we summarize the results here from a yearly perspective, as compared with our usual monthly perspective.

The year for FINRA was one of considerable change, with some major rule changes being filed or approved. 2014 was also marked by a major change in management, with Linda Fienberg retiring from the Dispute Resolution helm and Rick Berry assuming the new post. On the case administration side, from whence Mr. Berry rose, the year seemed relatively stable and uneventful. The Puerto Rico bond fund cases caused a stir, when they first hit the case submission stream and FINRA had to declare a brief moratorium on arbitrator appointments (see SAA 2014-10); that was more of an arbitrator recruitment problem than one of case administration and FINRA now claims to have 800 arbitrators willing to respond to that case surge.

New Case Filings

Two points about those Puerto Rico cases: first, while media reports indicate that as many as 600 such cases were filed with FINRA, it was difficult to find that surge among the monthly statistics; second, FINRA may have managed to cobble together a cadre of arbitrators to fulfill its forum responsibilities to the parties in the Puerto Rico cases, but the core problem of a shrinking arbitrator roster continues. On the first point, FINRA managed to complete 2014 by reporting more new cases filed than in 2013, but: the final number, 3,822 cases, stands just 3% above last year’s number (3,714); without the Puerto Rico cases, 2014 might well have come in as the lowest case-inflow year in this Millennium; and, as it is, the 3,822 total exceeds only last year’s and the final tally in 2007 (3,238). From the perspective of a quarterly review, the fourth quarter finishes last: 1st qtr: 1,011; 2nd qtr: 1,031; 3rd qtr: 893; and 4th qtr.: 887 (ed: find the PR case surge in these stats!)

Shrinking Arbitrator Roster

We’ll cover the shrinking roster problem while on the subject. We have all heard, if not witnessed, the very considerable efforts FINRA expends in recruiting arbitrators. Staff is in communication with organizations around the country, recruiting neutrals and make frequent visits to conferences and other events to buttress the arbitrators ranks. One of the major rule changes in 2014 was the raising of forum and filing fees in all sectors in order to fund a needed pay hike for FINRA arbitrators (see RN 14-49, SAA 2014-44). FINRA evidently believes that this fee hike will reverse a troubling trend. At the end of 2012, FINRA’s arbitrator roster showed a total of 6,455 arbitrators, 3,584 of whom were classified as Public Arbitrators. At the end of 2013, the roster total declined to 6,426, a loss of 29 arbitrators; 22 of that net loss of 29 were from the Public Arbitrator side (3,562). In its latest December 2014 report, the total neutral roster stands at 6,361. That’s a decline from year-end 2013 of 65 arbitrators. And the Public Arbitrator numbers, to which FINRA must turn to fill some 85% of its seats in customer-related disputes? That contingent contributed 35 to the net loss of 65 arbitrators.

Average Turnaround Time

Over the past two years, the average time from filing to close-out (ATT) has risen only a couple of weeks, when the full FINRA caseload is considered; the “Overall” category in FINRA’s ATT stood at 14.4 months in 2012, quickened a bit to 14.3 months in 2013 and ended 2014 at 14.8 months – not much change. The same goes for Small Claims cases that are decided on the documents (“Simplified Decisions”); that category fluctuated from 7.1 to 7.3 to 7.8 months over the three-year period. Thus, each category is up and that holds true for cases decided after hearing (“Hearing Decisions”), but, in the “Hearing Decision” category, the increase in ATT rose from 16.6 months to 18.1 months. That’s more like a six-week increase!

Since the composition of the “Overall” category has not changed that much over the past few years (approx. 18% Hearing Decisions, 5% Simplified Decisions, 60% Settlements, and 17% Other), we can project that something else in the “Overall” mix is declining in the time it takes, as the 23% of decided cases is rising. That something has created a 3.3 month gap between “Overall” and “Hearing Decisions” in 2014, when the gap was only a 2.2 month difference in 2012. Our guess is that that “something” is settlements. The figures suggest that parties are settling at an earlier point before hearing than in past years. Why would that be? The cause could be singular or multiple. For our part, we worry that the process is becoming too long. What’s too long? Well, it’s not as long as court, but when parties start to settle for the wrong reasons (pressures of time, rising costs, stress of delay, unpredictability of outcome), at that point, the process needs review and repair.

Mediation Outcomes

Mediation at FINRA is not necessarily the whole picture, we are given to understand, so the dwindling statistics, in terms of matters opened and closed, is not necessarily indicative of the popularity of mediation in the total securities dispute resolution community. Mediation cases in agreement fell in 2014 some 11% from 482 cases in 2013 to 431. Mediation apparently had a strong finish in the case close-out sector, with almost a hundred cases closed in the last two months, for a total of 551 versus 482 at the end of 2013. Average turnaround time increased 8%, as cases extended their time in mediation from 95 days in 2013 to 103 in 2014, but the settlement success rate has remained in the area of 80% for the past three years.


FINRA-DR’s monthly report lists 11 “controversies” and 11 “security types” that characterize its incoming caseload. As it is the end of the year and the past two years are comparable in total numbers, year-to-year comparisons are tempting. We note, at the same time, that most of the categories have been developed to characterize customer disputes, so we presume the intra-industry disputes that were filed are not generally accounted for in these controversy and product categories. Controversies: Among the categories where increased activity appears, we found that only breach of contract claims (1,779 vs. 1,418), followed by margin calls (83 vs. 68), approached a 20% year-to-year increase. Those in the 10% and above category included failure to supervise (1,782 vs. 1,480); negligence (1,993 vs. 1,715); omission of facts (1,394 vs. 1,243); breach of fiduciary duty (2,106 vs. 1,873); and unsuitability (1,396 vs. 1,243). From an overview standpoint, that seems to say that disputes were driven less by intentional torts, fraud, or serious breaches of trust, and more by contract differences and misjudgments. That observation is somewhat reinforced by the fact that churning and unauthorized trading claims were lower than last year, in terms of new filings. Products: The most obvious increases in terms of the types of securities involved in the disputes occurred with mutual funds (378 vs. 308) and options (149 vs. 115). Most of the products fell in number. The common stock category was up a little (599 vs. 561) and variable annuities fell the most (174 vs. 120). Corporate bonds fell from 92 cases to 70 in 2014, continuing a decline apparent over the past five years (2010: 229). (SAC Ref. No. 2015-04-01)

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