On the heels of the Financial Industry Regulatory Authority’s (“FINRA”) record-breaking financial penalty against app-based investing platform Robinhood, it’s a fitting time to consider recent trends within FINRA’s industry-wide arbitration process.
As an organization, FINRA’s main function is to protect investors by upholding the integrity of the market through careful oversight of brokers in the United States. In doing so, FINRA operates a dispute resolution forum for arbitration and/or mediation of both intra-industry and customer-industry disputes. FINRA is also authorized by the United States government to protect investor interests through diligent screening and analysis of the billions of market transactions that occur each day. [1]
Whether a dispute arises between industry actors or between customer(s) and an industry actor, FINRA facilitates a neutral dispute resolution process by providing unbiased, trained arbitrators or mediators to guide cases through to completion. While the FINRA dispute resolution process proceeds similarly to a case within the court system, FINRA cases typically resolve more quickly and efficiently than traditional cases do, and appeals on FINRA outcomes are generally not accepted.
So how have customers fared through FINRA-facilitated cases over recent years? First, its important to consider the broader landscape of how FINRA customer arbitration cases typically close. Overall, the vast majority of customer cases are resolved through a settlement between the parties. In contrast, only about 18% of customer cases result in an award, and another 9% of cases are ultimately withdrawn. [2]
Regarding the approximately 70% of cases that result in settlement, the majority provide some monetary relief to the customer claimant. [2] For those cases which proceed all the way to an award for one party or the other, FINRA provides a publicly accessible Arbitration Awards Database which catalogs each award granted. [2]
This year, through the end of May 2021, a total of 227 cases, 13% of all cases filed, have been decided by arbitrators. 63% have resulted in a direct settlement by the parties, with the balance of cases either settled by mediation, withdrawn, or resolved by some other means. These statistics are largely in line with case outcomes in 2021, although prior to the COVID-19 pandemic, marginally more cases were decided by arbitrators. [3]
Of the customer claimant arbitration cases which resulted in an award thus far in 2021, 32% have resulted in the customer claimant receiving damages. This directly mirrors outcomes in 2020, while each year from 2016 through 2019 saw 40% or more of such cases resulting in customer claimant damages. [3]
Thus far in 2021, the top controversy types brought in customer arbitrations are Breach of Fiduciary Duty and Negligence, both of which also topped the list in 2019 and 2020. Misrepresentation, Failure to Supervise, and Breach of Contract round out the top five most common controversies. [3]
Unsurprisingly, given the volatile state of the market this year brought on by forces like the COVID-19 pandemic and the meme stock frenzy, 2021 has seen an uptick in cases brought for errors with charges and for margin calls. Through May, the average number of cases brought for errors with charges from 2017 through 2020 was only 29, while 2021 has already seen 75 such cases. Likewise, from 2017 through 2020, the average number of cases brought for margin calls was 31, while this year has seen 41. [3]
All in all, FINRA has remained diligent in helping to resolve customer claimant cases throughout the COVID-19 pandemic by transitioning traditional hearings into an online zoom format and continuing to offer support to investors. Monitoring customer claimant outcomes through the remainder of 2021 will provide interesting insight into how FINRA’s dispute resolution system is working to protect investor interests in the face of fast-paced market changes brought on by cryptocurrency, new technology, and the rise of app-based trading.
Sources:
[1] https://www.finra.org/about
[2] https://www.finra.org/arbitration-mediation/resolution-and-results-customers
[3] https://www.finra.org/arbitration-mediation/dispute-resolution-statistics#arbitrationstats