With the first five months of the year passed, 2019 is shaping up as a slow year -- something we comment on below -- but FINRA-DR's May statistical report contains some surprises (Manipulations on the rise!?). So far in 2019, the monthly statistics on new case filings, as reported by FINRA's Office of Dispute Resolution, have run as follows: They started the year at 336 for January, dropped to 244 in February, stayed at that historic low in March, with 250, and, in April, rose again to 333. The latest statistical report on FINRA-DR's operations indicates that 1,485 cases have been submitted to the facility in the first five months of this year. That calculates to a showing of 322 new cases for the month of May and compares wanly to 1,909 cases filed by this time in 2018. If the current case inflow rate continues through the rest of the year, the annualized total will be in the range of 3,600 cases, which is the general range of case filings for 2013-2017. So, we're ready to declare the 2018 results of 4,325 an outlier -- one caused by short-term conditions that have dissipated in 2019 -- and the 2019 results as more symptomatic of a long-term, flat trajectory. We see that as a worrisome trend.
Editorial Comment:
Why is it a concern? Well, here's our thinking. FINRA is a non-profit organization, but presumably its leaders apply business thinking to the Authority's public-interest mission. FINRA-DR contributed some $39 million of the approximately $300 million in revenues reported by FINRA in 2018. At more than 10% of the revenue pie, that's a significant slice -- but 2018 was a special year. The market was down, FINRA's investment portfolio suffered a net loss, and FINRA's ODR facility had a banner year compared to recent prior years. With the market up 17% in the first half and FINRA-DR's new case and pending case stats on the decline, its contribution will be well below 10% in the current year. What happens to divisions with dwindling revenues? They get less support and yield less clout internally. Because we view FINRA arbitration favorably and consider it an important tool for maximizing investor protection and assuring open markets, we see lack of growth as a regulatory deficit and a worrisome trend. (ed: We would be more sanguine on this issue were opportunities for growth not being ignored -- see our recent article, SAC 2019-02, on NASAA, RIAs and FINRA Arbitration.)
Overview of New Cases
Back to "business" ... We can say that the gap between new "Customer" cases being filed and new "Intra-Industry" cases is widening, as the 22% decline in case inflow breaks out to a 14% decline in customer-related matters (1,009 v. 1,180 in 2018) and a 35% decline (476 v. 729) in industry-related matters. The only two customer-oriented controversies that reflect growth over last year's five-month results are: "Manipulation" (145 v. 106), which, quizzically, has been rising YOY as an allegation for the past five years; and "Margin Calls" (46 v. 30). The latter makes sense to us; the former is a mystery, but one regulators might want to investigate. Product-wise, "Municipal Bonds" and "Municipal Bond Funds" (read "Puerto Rico" cases) are still on the top of the charts, but they are down significantly (500 v. 729) from last year at this time, while still fairly robust compared to the three years before. The products that are producing more new cases than last year are "Options" (101 v. 90), "REITs" (94 v. 76), "Private Equities" (55 v. 45), and "Variable Annuities" (42 v. 41).
Customer Win Rates/Arbitrator Recruiting
What's this? Customer claimant cases are not going to hearing any more than they have in the past couple of years, but the results are looking up for those who take the risk and insist on their day in "court." Overall, only 18% of all closed cases are being decided by arbitrators. That percentage first sank from the low 20s in 2017 and has reached as low as 14%. Customer-claimant cases decided by arbitrators have tracked even lower than that overall level and register at 14% of all customer-claimant cases closed in 2019. The "win" rate for customers, on the other hand, has popped up to 45%, a higher showing than any of the past six years. And Small Claims cases (Paper Only) appear to be a strong contributor to this rise, with 15 of the 30 decided cases indicating a monetary award for the customer; that's 50% of the "paper" cases," up from 35% in 2018! Small claims are mixed with all other customer cases in the reported statistics for "Hearing Only" cases. There, the win rate stands at 43% vs. 42% in 2018. The bigger cases involving customers -- those heard by three-person panels, turned in a 48% win rate vs. 44% in 2018 -- a rising tide is lifting all boats, it seems. Why don't customers take the plunge more often?
(ed: The number of neutrals on FINRA-DR's roster just keeps going up -- soon it will surpass 8,000! At 7,957 total, the roster is comprised today mostly of Non-Public Arbitrators, with a large minority of Public Arbitrators (3,650). FINRA added 35 Public Arbitrators in May. We're glad to see the focus on recruiting Public Arbitrators, since they occupy about 85% of the seats in decided cases.)
