An irreverent Wall Street Blog
That Customer Complaint May Not Be A FINRA Reportable Event
December 4, 2015
Not all customer communications are necessarily
"complaints;" and, not all complaints pertaining to customer accounts
are prepared and sent by the customer. Two seemingly obvious points. Ahhh . . .
but it's how we interpret the underlying facts and circumstances that often
makes all the difference in Wall Street regulation. Similarly, who is
responsible for detecting an event that doesn't need to be reported or one that
does may often explain why a compliance person is the Chief Compliance Officer
versus a mere in-house examiner or why one industry lawyer is paid $250 an hour
and another $600 an hour. Then again, there are a lot of morons who rise to
managerial ranks and who has not heard the horror stories about over-priced
lawyers?
Case In
Point
In a Financial Industry
Regulatory Authority ("FINRA") Arbitration Statement of Claim filed
in December 2014, associated person Claimant Hartman asserted breach of
contract, breach of equitable and just principles of trade, negligence, and
filing of misleading information as to membership or registration. The causes
of action relate to Claimant's allegation that Respondent VFG Securities had
improperly submitted regulatory disclosures pertaining to Hartman when, in
fact, the underlying event did not so require. At issue was a purported
September 22, 2010 customer "complaint" made by alleged customers Mr.
BH and Mrs. LH ("BH and LH Complaint"). In addition to seeking an
expungement of the customer matter from his Central Registration Depository
file ("CRD"), Claimant sought compensatory damages, among which were lost
earnings, future earnings, benefits and other remuneration. Additionally,
Claimant Hartman sought attorneys' fees, expert witness fees, costs, and
disbursements; interest, and forum fees. In the Matter of the FINRA
Arbitration Between Tony M. Hartman, Claimants, vs. VFG
Securities, Inc., Respondent (FINRA Arbitration
14-03803, November 23, 2015).
Respondent VFG generally denied
the allegations and asserted various affirmative defenses; however, Respondent
took no position with respect to the requested expungement.
Settlement
On June 23, 2015, Claimant
advised FINRA that the parties had settled the matter and he requested an
expungement hearing. As noted in the FINRA Arbitration
Decision:
On November 3, 2015, Claimant filed an unopposed brief on whether the customer in an underlying dispute must be notified of a registered person's request for expungement relief. The Arbitrator finds that narrow circumstances discovered through case information and by testimony during the hearings persuade him to allow Claimant relief from FINRA's expanded expungement guidance that suggests associated person(s) provide a copy of their Statement of Claim to the customer involved in an underlying arbitration.The Arbitrator determined that no settlement agreement exists with relation to the BH and LH Complaint.
Expungement
Recommendation
In recommending
expungement, the sole FINRA Arbitrator explained
that:
Claimant testified and demonstrated his method of introducing clients to potential investments: group meetings. individual sessions, careful explanations about each investment being suggested, and individual sessions with each potential client prior to sale. This method allowed each client several choices for their portfolio. The customer, BH, identified In the Statement of Claim, complained to the Respondent directly and made accusations that are inaccurate and unsubstantiated. As a matter of fact, the product was sold to LH for inclusion into her Individual Retirement Account ("IRA"). LH is the wife of BH and is a participant in other investments purchased through Claimant. This fact may cause BH to have no standing as a complainant about Claimant and his dealings with LH and her IRA Investments.Another peculiar Issue regarding this claim is the fact that no written complaint from BH, or anyone elss is known to exist. A phone call from BH to Suzanne Bond, an officer of Respondent's, caused Ms. Bond to speak with FINRA regulation about this issue. Ms. Bond, representing Respondent, then filed a report that became part of the CRD record of Claimant.A careful review by the Arbitrator of the New Account Form indicates no abuse of LH's Investment Objectives. These forms were completed at the time of the investment by LH.
Bill Singer's
Comment
Compliments to the sole FINRA
Arbitrator for providing us with sufficient content and context to make sense
of the expungement recommendation. The rationale shows a commendable effort to
parse through the many nuances of customer communications and to arrive at a conclusion
based upon sound reasoning.
A number of issues jump out at
me in this arbitration. For starters,
consider, in pertinent part, FINRA's rule concerning the disclosure of
reportable events:
FINRA Rule 4530. Reporting Requirements(a) Each member shall promptly report to FINRA, but in any event not later than 30 calendar days, after the member knows or should have known of the existence of any of the following:(1) the member or an associated person of the member:
. . .(B) is the subject of any written customer complaint involving allegations of theft or misappropriation of funds or securities or of forgery;. . .(G) is a defendant or respondent in any securities- or commodities-related civil litigation or arbitration, is a defendant or respondent in any financial-related insurance civil litigation or arbitration, or is the subject of any claim for damages by a customer, broker or dealer that relates to the provision of financial services or relates to a financial transaction, and such civil litigation, arbitration or claim for damages has been disposed of by judgment, award or settlement for an amount exceeding $15,000. However, when the member is the defendant or respondent or is the subject of any claim for damages by a customer, broker or dealer, then the reporting to FINRA shall be required only when such judgment, award or settlement is for an amount exceeding $25,000; or . . .. . .
(e) Nothing contained in this Rule shall eliminate, reduce or otherwise abrogate the responsibilities of a member or person associated with a member to promptly disclose required information on the Forms BD, U4 or U5, as applicable, to make any other required filings or to respond to FINRA with respect to any customer complaint, examination or inquiry. In addition, members are required to comply with the reporting obligations under paragraphs (a), (b) and (d) of this Rule, regardless of whether the information is reported or disclosed pursuant to any other rule or requirement, including the requirements of the Form BD. However, a member need not report: (1) an event otherwise required to be reported under paragraph (a)(1) of this Rule if the member discloses the event on the Form U4, consistent with the requirements of that form, and indicates, in such manner and format that FINRA may require, that such disclosure satisfies the requirements of paragraph (a)(1) of this Rule, as applicable; or (2) an event otherwise required to be reported under paragraphs (a) or (b) of this Rule if the member discloses the event on the Form U5, consistent with the requirements of that form.
According to FINRA Rule 4530,
not every communication from a customer is a "complaint." Among the
more common errors that I see many member firm compliance departments commit is
to uniformly treat far too many "communications" from customers as
involving a "complaint," when, in fact, the communication is merely
an inquiry or comment. Further, not every customer complaint necessarily rises
to the level of an event requiring disclosure; for example, a complaint that a
stockbroker was rude on the telephone or that the firm's online platform is not
user friendly would not (absent more) require a regulatory disclosure.
Additionally, even if a
communication involves what may be deemed a reportable complaint, another
important determination is whether the communication emanated from a customer
or was transmitted subject to the customer's authorization (through a lawyer or
agent as two common examples). At times a customer's family member or friend
may send to an employer firm a complaint against a stockbroker. If the sender of that complaint is not a
customer, then that communication may not require regulatory disclosure --
which is not to suggest that a firm's compliance department should not inquire
as to the issues raised.
Many industry participants do
not necessarily consider whether a customer communication voicing a complaint
is in "oral" or "written" form. A peculiar quirk of FINRA's
rules is that the self-regulator's reporting requirements require the prompt
reporting of "any written complaint" and do not similarly address the
mere "oral complaint. Additionally, FINRA's reporting requirement limits
the reporting of "any written customer complaint" to those
"involving allegations of theft or misappropriation of funds or securities
or forgery."
Always be mindful, however, of
the difference between the obligations imposed upon a FINRA member firm to
report events to the self-regulatory organization and the separate disclosure obligations
of the Uniform
Application for Securities Industry Registration or
Transfer ("Form
U4"). Notably, under the Form
U4 heading: Customer Complaint/Arbitration/Civil
Litigation Disclosure, we find the following Item 14I
questions:
Also READ: "FINRA Complains About CCO Complaint Reporting" (BrokeAndBroker.com Blog, October 29, 2015)(2) Have you ever been the subject of an investment-related, consumer-initiated (written or oral) complaint, which alleged that you were involved in one or more sales practice violations, and which:(a) was settled, prior to 05/18/2009, for an amount of $10,000 or more, or;(b) was settled, on or after 05/18/2009, for an amount of $15,000 or more?(3) Within the past twenty four (24) months, have you been the subject of an investment-related, consumer-initiated, written complaint, not otherwise reported under question 14I(2) above, which:(a) alleged that you were involved in one or more sales practice violations and contained a claim for compensatory damages of $5,000 or more (if no damage amount is alleged, the complaint must be reported unless the firm has made a good faith determination that the damages from the alleged conduct would be less than $5,000), or;(b) alleged that you were involved in forgery, theft, misappropriation or conversion of funds or securities?