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FINRA Arbitration Statistics for 2021: Deck Continues to be Stacked Against Investors

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FINRA—the Financial Industry Regulatory Authority—is a private, self-regulatory organization that regulates brokerage firms, financial advisors, and advisory firms. FINRA offers arbitration and mediation services for investors who seek assistance with some registered member that they feel has violated FINRA’s code of conduct.

FINRA maintains a public record of financial advisor and brokerage disciplinary actions and complaints which any investor can access when doing their due diligence on the advisor or firm they are considering hiring. This public record can be found at https://brokercheck.finra.org/. When seeking a new advisory firm, financial advisor, or brokerage firm, MDF Law strongly recommends dealing only with those entities that are registered with FINRA.

Through FINRA’s arbitration and mediation services, disputes can be resolved far more rapidly than through traditional litigation.

In many cases, litigation would not even be possible, because FINRA hears all cases that violate its code of conduct, not only those that violate the law of the land. An advisor who has violated the FINRA code of conduct, such as by not being entirely transparent about certain investments, but who has not violated federal or state law will not be tried in court. So, by dealing only with FINRA-registered advisors and firms, investors ensure they have recourse no matter what.

Difference Between FINRA Mediation and FINRA Arbitration

Arbitration and meditation are for reclaiming damages. Investors can request either service if they wish to recoup losses. Investor complaints are to report suspected fraud. FINRA would look into the suspected fraud and take disciplinary action as needed but they would not specifically seek out damages on behalf of defrauded investors.

Arbitration is more formal than mediation. Arbitration is a little like going to a traditional court, although the procedure is a bit faster. Decisions are handed down by one or more arbitrators and are binding.

Mediation is more informal. Participants enter into it willingly and must both agree on any settlement before it becomes binding. Mediation is voluntary and either party can stop at any time. In over 80% of FINRA mediation cases, a settlement is reached.

FINRA virtual hearing statistics for 2021

Virtual hearings are those conducted over video conferencing software. Currently, FINRA uses Zoom for virtual hearings.

FINRA implements certain security practices for these types of hearings, such as:

  • Randomly generated IDs
  • A password to access the Zoom call
  • Waiting room feature so that only invited participants are granted access

All FINRA Zoom hearings are carried out on US Data Centers.

As of December 31, 2021, 269 customer cases had at least one virtual hearing.

Of those arbitration cases that had at least one Zoom hearing, 131 customer claimant cases were decided on the merits. (To decide a case “on the merits” means those cases that were closed based on the evidence rather than on procedural grounds.) Of those decisions, 60 cases awarded the claimant damages, or 44 percent.

New case statistics for 2021

In 2021, FINRA had 1,895 new customer cases filed. (A “customer case” is one that is not held between firms, but rather between a customer/investor, and a registered FINRA member, whether a firm or an individual.)

The average decision time for all cases was 15.4 months. For “paper decisions”—those where no in-person hearing was necessary—the average was 5.1 months.

Special hearings, sometimes referred to as simplified hearings, had an average turnaround time of 8.8 months. Special hearings are heard entirely telephonically; each side has only two hours to present its case; no cross-examination is allowed; 30 minutes is allowed for rebuttals. Special hearings are completed in a single day and contain a maximum of two hearings.

2021 saw 9% fewer customer cases filed than in 2020.

Close statistics for 2021

A total of 4,029 cases were closed in 2021. This includes intra-industry cases.

Types of cases heard

The type of complaint is called a controversy. Each case might have multiple controversies.

The most heard controversy is Breach of fiduciary duty, with a total of 1,445 cases served in 2021.

“Breach of fiduciary duty” is one of those matters that is often unlikely to be tried in a court of law unless there was outright fraud involved. But by dealing with FINRA-registered advisors and firms, an investor does have recourse.

The second-most heard controversy is Negligence, with 1,371 cases containing this.

The other most popular types of controversies heard were:

  • Failure to Supervise—this refers to FINRA Rule 3110, Supervision, which states that a registered member must have certain supervisory practices in place. In 2021, 1,218 cases contained this complaint.
  • Misrepresentation—1,181 cases.
  • Breach of Contract—1,110.
  • Suitability—FINRA Rule 2111 is about Suitability and covers, among other things, the fact that advisors must only recommend investment products and strategies that are suitable to that investor. In 2021, 1,071 cases had this controversy.
  • Omission of Facts—Rule 2210 is about Communication with the Public and states that no advisor may omit material facts when dealing with a client. 2021 saw 958 cases on this topic.
  • Fraud—744 cases.

Other controversies included violations of Blue Sky Laws, manipulation, elder abuse, churning, and unauthorized.

The most common securities types involved in customer cases were common stock (433 cases) and Real Estate Investment Trusts (429 cases). Business Development Company (BDC) cases reached 177, and private equity cases came fourth on the list with 161 cases served.

Low customer win-rate

Of all the cases heard, both customer and intra-industry, 59% were directly settled by the parties involved, and 11% were settled through mediation.

The win-rate for customers is dismally low:

  • Regular hearings only—37%
  • Special proceeding hearings—13%
  • Paper only—19%

This low win-rate is too often attributable to advisors and firms having access to expensive legal defense teams while the customer does not.

FINRA Arbitration Process Explained

Need an Attorney to Handle a FINRA Arbitration?

Contact MDF Law if you need an attorney to handle a FINRA arbitration matter. Our attorneys have helped recover over $100 million on behalf of investors. Contact us today for a free consultation.

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FINRA Arbitration

FINRA Arbitration

Our attorneys have extensive experience handing arbitrations before the Financial Industry Regulatory Authority, or FINRA.   As an investor, you may depend on an investment broker or investment firm to professionally handle your investments. By hiring a securities professional and paying them fees to manage your investment interest, you can expect that your assets are directed in a caring and fair manner.  Unfortunately, there are circumstances when you feel that your financial assets are being mishandled by the financial professional you hired. In these circumstances, you need an experienced securities lawyer to represent your FINRA Arbitration Claim. 

What is the FINRA Arbitration Claim?

A FINRA Claim applies when an investor asks a FINRA Dispute Resolution Panel to resolve their dispute against a securities broker or brokerage firm for the mishandling of their investments.  To initiate this process, an investor can file for an arbitration claim or request mediation through FINRA if they feel their money or investment is being mishandled by a brokerage firm or one of its broker agents. However, the violation must have happened within the past six years for the FINRA Arbitration Claim to be valid. 

Active FINRA Complaint Investigations

We are currently investigating complaints against the following broker-dealers: LPL FinancialNational Securities CorporationUBS FinancialWells Fargo AdvisorsRobinhoodRoyal Alliance Associates, Stifel Nicholas and Oppenheimer.  If you or someone you know lost money investing with any of these firms or have complaints, please call us for a free and confidential consultation at 800-767-8040.

What Are the Damages Available Through FINRA Arbitration?

As with any litigation, damages are sought by the claimant from the respondent. Under the FINRA Arbitration Claim, the following damages are available to the claimant: 

FINRA-Arbitration

Actual Damages

Actual damages or compensatory damages refer to the monetary sum ordered to compensate the claimant for their loss. These types of losses may include, but are not limited to:

  • Net Out of Pocket Losses: This refers to the claimant’s net out-of-pocket losses that the FINRA panel’s assessment of the claim and evidence presented.  
  • Benefit of the Bargain: This refers to the claimant’s expected value of their investment.  
  • A Well-Managed Portfolio Account: This is the difference between what the claimant’s account made or lost due to the respondent’s mishandling, in contrast to that of a well-managed portfolio that the claimant would have had in the same time frame.

Statutory Damages

Statutory damages apply if a claim by the investors is based on a statute. Here, the damages are based on what the law requires and how the damages are to be calculated. 

Recission

Rescission is the term to put the claimant’s financial situation before the respondent’s wrongful transaction. This remedy may mean that the broker or the brokerage may be ordered to return the securities at issue to the claimant. 

Disgorgement

Disgorgement is when the FINRA Arbitration panel ordered the respondent to disgorge the profits or commissions they made from the claimant. This damage aims to make the wrongful acts unprofitable for the respondent to discourage brokers and brokerage firms from committing these acts. This type of damage may even be ordered by the panel even if the claimant did not suffer any net out-of-pocket losses. 

Specific Performance

Specific performance applies when the FINRA Arbitration panel requires that the respondent fulfill their legal or contractual obligation to the claimant if it is determined that monetary damages alone are inadequate to remedy the wrongdoing of the respondent. 

Punitive Damages

Punitive damages are awarded to penalize the respondent for the severe misconduct that they had committed. The standard for awarding punitive damages varies by state and jurisdiction. 

Litigation Costs

Generally, arbitration cases involving securities include litigation expenses not limited to filing fees, copy costs, hearing costs, and other related administrative and substantive legal costs. Typically, winning parties ask litigation costs incurred in the FINRA Arbitration Claim to be reimbursed by the losing party. 

Requests to Include Interest as Part of the Award

This type of remedy applies if a party explicitly requests that the FINRA Arbitration Panel include interest as part of the award. To award this to the claimant, the panel considers the following issues: 

  • A statutory or contractual basis that allows interest to be awarded; 
  • Amount of or rate interest; 
  • Date interest begins; and 
  • Date interest ends.

The interest rate to be applied in the calculation of the damages varies by jurisdiction and case. The basis for interest rates can range from those required explicitly by the states, the Internal Revenue Service rates, treasuring bills, or the broker’s interest rates to its customers for outstanding debts. Regarding the date on when the interest rates are to be applied, arbitrators generally apply the interest rate from the date of the contract was breached or the time that the panel determined that a debt is due or payable. 

Do You Have a FINRA Arbitration Claim?