No surprise. When the market is down, lawsuits and arbitrations against brokers go up. In a really bad market like we had last year, they go way up. In a speech to the DC bar, FINRA dispute resolution president Linda Fienberg noted that the market turmoil of the last two years has led to an increase in the number of arbitrations. The kind of claims that are submitted has also changed, she said.
A whopping 7,134 arbitration files were submitted in 2009 -- a definite increase from the 4,982 arbitration cases filed on 2008, and the 3,238 arbitration cases submitted in 2007.
One of the things I learned as legal counsel to the IDS Mutual Fund Board of Directors is that the number of cases filed goes up when stock prices go down. For example, when the dotcom bubble burst, nearly 9,000 arbitration claims were submitted in 2003.
According to Fienberg, part of the increase is due to more claims related to auction rate securities. The last two years also saw an increase in this type of claim over mutual funds, making auction rate securities the most common security cited in arbitration cases.
According to FINRA statistics, more claimants are prevailing, with 48 percent in 2009, compared with 42 percent in 2008. This is about the same statistics that I used to quote in my speeches: Investors win about 50 percent of the time, and usually about 50 percent of what they claim.
Cases are also being resolved in a shorter period of time -- within 14 months last year, compared to more than 15.5 months during each of the two years prior.
What you can do now to avoid being hit with an arbitration?
- Develop a relationship with your clients. Friends are less likely to sue you, because they believe you have their best interests at heart.
- Make sure your clients understand the pros and the cons of everything your recommend.
- Take good file notes. We try to send clients notes after every major meeting.
*For further information, or to contact this author, please leave a comment and your e-mail address in the forum below.