The Expert's Examiner


FINRA STATS, 8/19: CUSTOMER CLAIMS SURGE IN AUGUST, NEARLY DOUBLING FROM JULY TALLY.
October 6, 2019

We observed in our coverage of FINRA-ODR's monthly statistical report for July 2019 that, with 208 new customer claims filed that month, the monthly average for new submissions wasn't changing that much, but the mix was changing a lot. In August, the mix and the numbers reflect a big surge in customer claims. We noted in SAA 2019-33 (Aug. 28) that customer claims comprised 71% of the total July batch of new cases -- a substantial change from only 52% of the whole at the start of the year (Jan. '19). Still, monthly filings continued to form a fairly tight group around a 300-case average, meaning that intra-industry cases were fading as quickly as customer cases were growing in number. In August, 501 new cases were accepted by FINRA's Office of Dispute Resolution! As we calculate it, 371 of those cases - 74% -- are customer-related in character.

Source of the Surge?

Where are these new cases coming from? As readers know, FINRA-ODR publishes, among its monthly statistics, a chart titled, "Top 15 Security Types in Customer Arbitrations." In its August 2019 Report, FINRA places Municipal Bond Funds, Municipal Bonds and Mutual Funds at the top of that Chart. In the July 2019 Report, FINRA recorded 399, 392 and 306 new cases involving those products, respectively, in the first seven months. In August, those numbers popped to 574, 561 and 425, respectively, indicating to us that more Puerto Rico bond claims were filed. We confirmed that at the September PLI Seminar on "Securities Arbitration 2019" and discovered why as well.

Six-Year Eligibility Concerns

A prominent Claimant's attorney, who is known to be managing a large number of PR Bond matters, told us during a break at PLI that his firm and numerous others were filing now, as an important milestone in PR Bond pricing occurred in late summer of 2013. Media articles from that time talk of a "massive sell-off" in August and September, a "red flag" warning that arguably signaled notice that inquiry by investors should follow. We should add, however, that, even with this big burst of new cases, the totals for eight months don't approach the record year of 2018, when FINRA reported almost 1,000 Municipal Bond Fund and Municipal Bond cases for the full year.

Other Areas of Activity

Among the other "Security Types" for customer claims, we viewed significant increases in customer filings only in the "Government Securities" category (223 v. 375). Even though total customer filings lag last year by 9%, increases in YOY case filings are evident in other categories as well, including REITs, Private Equities, and Limited Partnerships. What do those categories have in common? They all hold the promise of higher yields -- attractive investments in a low-interest rate environment. On the other hand, "Common Stock" claims are lower in number (306) than they have been in the past five years.

Mediated & Direct Settlements

We've reported before that settlement rates have been steadily increasing, as the rate of cases being decided by arbitrators has dwindled to the teens. Only 17% of the cases concluded in 2019 were entrusted to arbitrators by the parties and, in the customer category in particular, only 14% are decided. There are some apparent anomalies in those statistics, though. We heard at PLI the very interesting observation from experienced inside and outside litigators that cases settled by direct negotiation are fairly uncommon nowadays -- that party counsel tend to expect that their cases will ultimately be mediated. The observations related to that dynamic go further, but it's interesting, in light of that apparent switch, that FINRA-ODR continues to report that 57% of concluded cases are settled by direct negotiation (and that direct settlements have risen steadily from 50% since 2015). Giving greater weight to the "field" reports, we guess that FINRA-DR is reporting settlements by mediation only when cases settle via FINRA-administered mediation. So many mediations are proceeding ex-FINRA that we assume those settlements are aggregated into the "Direct Settlement by Parties" category. The other anomaly -- win rates are going up, but customers opt to settle more and more -- is that a good thing?

(ed: We're a little puzzled by the number of claims relating to the "Government Securities" category of disputes. We guess that FINRA-ODR really means "U.S. Government Securities," and, if so, it could mean an increase in disputes born of an overuse of leverage in Treasury securities. That wouldn't be surprising, given the reach for yield factor and the low margin rates, but we wonder if staff may be mixing "apples and oranges" by counting claims relating to municipal securities as "Government Securities" disputes. That would be unfortunate and misleading, but it would explain the big rise from 375 through the first eight months of 2019 versus the same period in 2015, when only 45 disputes were reported. If there truly are more "Government Securities" disputes in the offing, please write and tell us what you are seeing, subscribers (to George@GFriedmanADR.com)! We'd like to know.)