Customer Finra arbitration claims against registered representatives and brokerage firms rose 12% in 2023, while alleged Regulation Best Interest and breach of fiduciary duty violations increased significantly on the self-regulatory organization’s list of controversies, according to Finra.
Breach of Regulation Best Interest claims, which first appeared in the self-regulatory organization’s list of controversies in 2022, jumped to 408 claims in 2023, up from 216 claims in 2022, Finra reported.
“Reg BI is not ‘new’ any more and is the clear standard by which most customer disputes will be based moving forward,” said Joe Wojciechowski, a partner with Stoltmann Law Office, which represents investors nationwide. “I am finding that arbitrators understand some of the Reg BI discovery issues better, like discovery into what research was done by the advisor in exploring reasonably available alternatives to the recommended transactions at issue."
In a similar vein, breach of fiduciary duty claims were the leading cited alleged violation in customer arbitration claims in 2023, up 13% to 1,891 cases in 2023 from 1,340 cases in 2022, Finra reported.
Negligence and suitability claims also rose, but not as fast or misrepresentation, fraud, churning, unauthorized trading and elder abuse claims, which were all up 12% or more, according to the regulator. Suitability claims also jumped from 1,220 to 1,580 claims in 2023.
Unauthorized trading (17%) and errors-charges claims (33%) both increased significantly in 2023, Finra said.
At the same time, failure to supervise claims increased from 1,433 to 1,731 cases and was cited by customers in nearly half of all arbitration claims brought in 2023, according to Finra.
While many of the claims may reflect potential supervisory and compliance gaps or deficits at firms, they were not accompanied by an increase in margin call complaints, although margin accounts hit a historic high of more than $700 billion in January, according to Finra.
Of products most cited in customer arbitrations as being problematic, there was an noteworthy reversal of sorts of top security type claims brought by customers, Finra said.
According to Finra’s statistics, there was a shift away from alternative and more speculative investments such as REITs, options, private equities, limited partnerships and business development companies to claims citing more traditional investments, such as mutual funds, ETFs and variable annuities.
Claims citing mutual funds, for instance, jumped from 159 to 294 in 2023.
“The decrease in ‘product’ cases and increase in the more old-fashioned or ‘standard’ cases is interesting to me. I am seeing it in my practice, too, and I think it’s a creature of the booming stock market. There are more excessive trading claims, more unsuitable or Reg BI violation and allocation issues, and more leveraged ETF type cases,” Wojciechowski said.
Claims citing corporate bonds stayed flat at 236 cases, but that number of claims is a large jump from 59 fixed-income claims in 2021. This may be a result of more investors seeking safety amidst volatility and historic interest rate incomes, Wojciechowski said.
“The uptick in bond cases suggests the rising rates in 2021-2022 caused some sticker shock, but I don't see that as any sort of long-term trend,” he said.