August 21, 2015
It's an interesting turn of a phrase: unnamed party. You don't see your name listed in the official caption of a lawsuit or arbitration but, nonetheless, you're required to make various regulatory disclosures because the complaining party was your customer or it was alleged that you had a role in the mess. Sometimes it's fair that you have to explain your conduct -- the customer may not have named you only as a convenience in terms of going after a deep pocket; other times, it's not fair because you didn't have any role in the matters under dispute and seem to have been dragged into thing based upon the thinnest thread. Consider this recent FINRA expungement arbitration.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in November 2014, registered representative Claimant Kief sought an expungement from her Central Registration Depository records ("CRD") of references to a 2012 FINRA arbitration brought by a public customer against Wells Fargo Advisors, LLC. In the Matter of the FINRA Arbitration Between Michele Elaine Kief, Claimant, vs. Wells Fargo Advisors, LLC, Respondent (FINRA Arbitration 14-03385, August 17, 2015).
Respondent Wells Fargo did not object to the requested expungement.
The sole FINRA Arbitrator hearing Claimant Kief's case ordered that she provide a copy of her Statement of Claim to the public customer in the earlier arbitration. The attorney for the public customer advised the parties and Arbitrator that the client was deceased.
Going to the Source Documents
Following a hearing in August 2015, during which the public customer's attorney did not oppose the requested arbitration and did not make an appearance, the Arbitrator recommended the requested expungement. In granting the Claimant's request, the Arbitrator considered:
- account opening documents;
- updates to account forms;
- Client Profile Information;
- witness testimony of Claimant;
- Claimant's BrokerCheck report; and
- the customer arbitration settlement agreement.
In addition to the fact that no party in the prior customer settlement had conditioned that settlement upon an agreement not to oppose an expungement, the Arbitrator also favorably noted that Claimant:
- was not a party to the settlement in the customer's arbitration;
- was not consulted regarding the settlement's terms; and
- did not contribute to the settlement.
In offering her rationale for recommending expungement, the Arbitrator explained that:
Bill Singer's Comment
[T]he Customer referred to on that page had alleged that he sustained losses for investments in Fannie Mae Preferred, Alpine Total Dynamic Dividend Fund and Calamos Global Dynamic Income Fund. Expungement is appropriate as to the Customer's investment in Fannie Mae Preferred because Claimant was not involved in any investment-related sale, practice violation, forgery, theft misappropriation or conversion of funds in connection with the securities and because the allegation against the Claimant is clearly erroneous. The evidence is that at the time of this investment recommendation. Claimant was on vacation and was not involved in the Customer's purchase of the shares. Claimant did not place the order for the transactions or ask anyone to do so in her absence.
Expungement is also appropriate as to the Customer's investment in Alpine Total Dynamic Dividend Fund because Claimant was not involved in any investment-related sales practice violation, forgery, theft misappropriation or conversion of funds in connection with the securities. This investment was suitable for the Customer based upon the Customer's stated investment objectives. The Customer received and reviewed the prospectus for the Alpine Fund shares, the Customer received confirmations that detailed the risks, and that the losses in the Alpine Fund shares were caused by the 2008 financial crisis and could not have been predicted by Claimant.
Expungement is also appropriate as to the Customer's investment in Calamos Total Dynamic Dividend Fund because Claimant was not involved in any investment-related sales practice violation, forgery, theft misappropriation or conversion of funds in connection with the securities. This investment was suitable for the Customer based upon the Customer's stated investment objectives of income and growth. The Customer received and reviewed the prospectus for the Calamos Fund shares, the Customer received confirmations that detailed the risks and the losses in the Calamos Fund shares were caused by the 2008 financial crisis and could not have been predicted by Claimant. . .
Compliments to the sole FINRA Arbitrator for authoring a tight, concise Decision.
A few observations:
Sometimes you're going to get sued directly, as in being named a Respondent in the caption of a FINRA Arbitration Statement of Claim; other times, you may not be named as a party but given the references to your customer and/or your purported role in the disputed transactions, you become what is essentially known as an "unnamed" party -- which in practical terms means that you will have "Yes" answers on your Form U4, disclosures on your CRD, and a public file displayed about the matter on BrokerCheck. In cases where you are an unnamed party with disclosures, consider how Kief pursued her expungement and defended her reputation.
One of the important takeaways in Kief's case is that she did not participate in the customer settlement. That's an important issue often lost on registered reps. As I have often written in the BrokeAndBroker.com Blog, is has become the fashion for many industry men and women to go along with whatever advice their firm's in-house or outside counsel offers when it comes to settling with a complaining public customer. Although such legal counsel may well be right more often than not, there are times when the advice is not necessarily in the registered person's best interest. All of which means that sometimes it's best to refuse to go-along-to-get-along and you may well have to refuse to sign-off on a settlement or contribute what you're being told is a de minimis amount. Note that the Arbitrator in Kief gave considerable weight to the Claimant's absence from any material role in the customer settlement.
Registered reps are often confronted with the choice of maintaining detailed notes and calendars on which all sorts of events are explained and recorded. Perhaps in Kief's case, her ability to produce memorializations of her vacation days and customer interactions (or her ability to prompt her recollection) saved the day or helped move the needle in her favor. Under slightly different circumstances, it's easy to image how maintaining such records could hoist you on your own petard by showing that you were not where you thought you were on a specific date or that you had not recorded an important client meeting that you insist took place. Consider the pros and cons and come up with the best strategy for you.
In Kief, the Arbitrator noted that the Claimant was on vacation at the time when one investment in dispute was made. It wasn't, however, conclusive that Kief was out of the office because she could have had the customer's call forwarded to her or she could have phoned into the office and handled the execution. As the record apparently demonstrated, she was not involved in the purchase at issue and did not ask any colleague to enter the trades during her absence. As a practice pointer, think about how you would have to prove such a negative -- and then think about how you might better protect yourself in the future if faced with such a claim.
I also noted that among the reasons for recommending expungement cited by the Arbitrator was that some losses were "caused by the 2008 financial crisis and could not have been predicted by Claimant." That finding is a clear indication that not every loss sustained by a customer necessarily means that the registered rep had engaged in misconduct. The world does come to an end at times and you can only sit by and watch the Apocalypse unfold.