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Statistics on Customer Complaints, Arbitration and Mediation
ecent data related to SEC investor complaints and NASD customer arbitrations reveals some interesting developments. Overall, this data reflects the changes taking place in the industry, primarily the advent of on-line trading. However, this data also reflects some important trends that investors should note.
SEC Investor Complaints
The number of complaints and questions that the Securities and Exchange Commission (SEC) has received from investors has risen sharply over the past several years. We found that the number of investor complaints and questions fielded by the SEC in 1999 represents an increase of nearly 39% over 1998. Moreover, since 1995 that number has increased a whopping 72%.
Of the investor complaints that were received by the SEC during 1999, the number of sales practice complaints (i.e., unauthorized trading in customer accounts) has declined slightly from past years. Meanwhile, operational complaints (i.e., account transfer problems, errors in processing orders and so forth) have risen substantially, and have become the leading category of complaints that the SEC receives.
In fact, the two most common investor complaints that the SEC received during 1999 were:
Complaints related to account transfer problems, which rose by 39% in 1999; and
Complaints related to errors in processing or executing orders, which rose a significant 60% during 1999.
Further, although the number of complaints for typical sales practice violations declined in 1999, there are several areas in this category where investor complaints have actually been on the rise. For example:
Complaints concerning a broker's failure to follow an investor's instructions rose by 17% compared to 1998; and
Complaints about false or misleading advertising rose by 42%.
Finally, the rapid growth of on-line trading has had a tremendous impact on many areas of retail brokerage. As one can imagine, the growth of on-line has resulted in a corresponding increase in customer complaints. Astonishingly, the number of on-line trading related complaints that the SEC received during 1999 represents an increase of 197% compared to 1998, and an increase of over 1100% compared to 1997!
NASD Customer Arbitrations
The number of customer cases filed for arbitration with the NASD through June 2000 has declined slightly from 1999. However the number of cases submitted to NASD mediation (a formal effort to settle a dispute) has risen by 25%. Furthermore, the number of NASD mediation cases closed through June of this year has increased by 21% (through June, 80% of cases submitted to NASD mediation have settled).
The majority of customer cases submitted to NASD arbitration involve disputes regarding common stock. In fact, these disputes compose an overwhelming 73% of the cases filed through June 2000 (options are a distant second, involved in 11% of customer cases).
Of the cases filed with NASD arbitration through June 2000, breach of fiduciary duty is the most common controversy. Negligence and misrepresentation are the second and third most common controversies, respectively. Notably, failure to supervise is the fourth most commonly litigated issue, and unsuitability comes in fifth.
Through June 2000, NASD Arbitration has closed approximately 2,680 cases. Of those 2,680 cases:
40% have settled;
22% have been decided by arbitrators after a hearing;
10% have been decided by arbitrators on the papers;
10% of cases have been withdrawn; and
12% have been resolved by the parties in mediation.
Interestingly, the 10% of cases closed through June 2000 "on the papers" (meaning that there was no arbitration hearing - hence no opportunity for the parties to call witnesses and present documents) exceeds the total number of cases decided "on the papers" during all of 1999.
Additionally, through June of this year, $40 million has been awarded to customer claimants. Significantly, of the $40 million, more than 1/3 was awarded in the form of punitive damages. This is notable for several reasons:
punitive damages are generally awarded for only the most egregious violations; and
arbitration panels have sometimes been regarded as somewhat reluctant to award punitive damages.
Finally, of the customer cases resolved in NASD Arbitration through June 2000, customer claimants were awarded damages 52% of the time. Although that percentage is down from the 1999 statistic (61% of customer claimants were awarded damages that year) and the 1998 statistic (60% of customer claimants were awarded damages that year), it still reflects a healthy customer "win" rate.
Moving forward, we expect to see a one to two year continued increase in customer complaints related to on-line trading while on-line firms scramble to handle increased demand. (see "ON LINE TRADING INTRODUCES A NEW CHAPTER IN CUSTOMER COMPLAINTS"). We also predict that sales practice complaints will rise dramatically either due to continued volatility in the markets or to a significant market decline.
James J. Eccleston is a securities attorney, representing investors as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He is the immediate past co-chair of the Chicago Bar Association's Securities Law Committee, the immediate past chair of its Financial and Investment Services Committee, a registered investment advisor and a licensed securities principal of the National Association of Securities Dealers (NASD). He can be reached at 312-641-2929. Eccleston & Associates, PC is the sponsor of FinancialCounsel.com.
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Sponsored by James J. Eccleston, an attorney representing stockbrokers, financial planners and
investors nationwide in arbitration, litigation and regulatory matters, and a shareholder with the law firm
Shaheen, Novoselsky, Staat, Filipowski & Eccleston
P.C.(www.snsfe-law.com). This Web site contains material
of general interest. It is neither intended to, nor constitutes, either legal advice or investment advice.
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