Our Promised Elaboration on the FINRA DRS 1Q Stats

This article first appeared on the Securities Arbitration Alert Blog, here.

FINRA Dispute Resolution Services (“DRS”) posted case statistics through March, with the overall case filing trends – with one exception – about the same as before. We summarized these stats in SAA 2022-16 (Apr. 28), and promised an analysis in this week’s Alert.

While we still caution that results after three months are a still somewhat small sample, we offer these headlines for the first quarter of 2022: 1) overall arbitration filings through March – 632 cases –  are down 19%; 2) cumulative customer claims declined by 29%; 3) industry arbitration filings are now up 4% (reversing last month’s 5% cumulative decline); 4) mediation cases continue to rise; and 5) pending cases continue to decrease. Overall arbitration turnaround times were 17.5 months, with hearing cases now taking 18.2 months (both figures are slight improvements from last month). There were 236 mediation cases in agreement, a gargantuan 125% increase (besting 2021’s torrid plus 49% pace). The settlement rate remains very high at 92% (it had been 89% last year). There are now 8,361 DRS arbitrators, 4,019 public and 4,342 non-public. Pending cases stand at 3,594, a decline of 54 from February. We elaborate below on some key takeaways.

Controversy and Security Types: the Top Fives

A few years ago, DRS began sorting the controversy and security types in descending order. We follow that pattern below, showing the top five in each category (ed: note that a single case can have multiple controversy or security types): Controversy Types in Customer Arbitrations: 1) breach of fiduciary duty; 2) negligence; 3) failure to supervise; 4) breach of contract; and 5) misrepresentation. Numbers 4 and 5 traded places from full-year 2021. Security Types in Customer Arbitrations: 1) common stock; 2) real investment trust; 3) private equities; 4) options; and 5) mutual funds. “Business development company” dropped out of the top five, replaced by “options.” The other categories carried over from 2021. Controversy Types in Intra-Industry Arbitrations: 1) breach of contract; 2) promissory notes; 3) libel, slander or defamation; 4) libel or slander on Form U-5; and 5) compensation. “Wrongful termination” dropped out of the top-five list and was replaced by “libel, slander or defamation.”

Customer “Win Rate”

FINRA has a stat showing the percentage of cases where customers were awarded damages. It is not a “win” or “recovery” rate; it simply shows the percentage of the cases where awards were issued (about 15% of customer cases concluded) where a customer was awarded damages of any amount. Whether one finds this stat useful, it does allow year to year comparisons. This figure stood at 31% for all (i.e., hearings, special procedures, and paper) awarded customer cases in 2021, down from 32% in 2020 and 45% in 2019. Through 1Q 2022, this figure had stabilized at 32%. The picture was the same when only hearing cases are considered. There does seem to have been a “Zoom Effect” in that customers received damages in 44% of 39 cases with at least one evidentiary hearing conducted by Zoom, as compared to 31% of 13 cases conducted entirely in-person. We caution that the sample size for this stat is very small.

Pending Cases Continue to Decline

For months after the pandemic’s onset in March 2020, the pending cases stat built up to a high of 5,415 open cases in August 2020. The last 19 months, however, have each experienced declines in pending cases, reflecting a 1,821-case reduction from 2020’s high water mark.

Speaking of Mediation

There were 236 mediation cases in agreement for the quarter, a significant 125% increase over 2021. With 82 new mediations, March was another month with healthy mediation filings. Recall that, as reported in SAA 2021-46 (Dec. 9), Director of Arbitration Rick Berry attributed the dramatic increase to: the return to in-person hearings; ending waiver of postponement fees for all cases (September 2021); comfort at being in person after inauguration of DRS’s mandatory vaccination policy; growing use of Zoom for mediations; and the return of Mediation Settlement Month. The strong settlement rate also continues, with nine out of ten mediation cases (92%) continuing to result in a settlement.

(ed: *If the trend holds, the 632 arbitrations filed for the quarter straight-lines to about 2,500 yearly arbitration filings, a weak year by any measure. Time will tell. **Overall and hearing processing times ticked down a bit in March, after increasing earlier this year. We will keep an eye on this one, since we again wonder if the resumption of in-person hearings in August 2021 is somehow linked to this stat. Common sense tells us it is easier to schedule and attend virtual hearings, than those conducted in-person. ***We also wonder whether industry “return to the office” and vaccine mandates will cause employment and promissory note cases to increase in 2022? So far, only the “libel, slander or defamation” category has increased. ****Again, kudos to FINRA DRS for eliminating the pending cases backlog. *****Past year stats can be found here.)

author

George Friedman

George H. Friedman is the publisher and Editor-in-Chief of the Securities Arbitration Alert, a weekly online publication covering the latest developments in financial services arbitration and mediation. He is also the principal of George H. Friedman Consulting, LLC, providing expert advice on arbitration and mediation in general and the FINRA…

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