SIDE BAR: Although the AWC states that "During all periods mentioned herein, Robinson was associated with Morgan Stanley . . .," the only dates mentioned are "[b]etween September 2014 and August 2015 . . ." According to online FINRA BrokerCheck records as of September 11, 2017, Robinson was registered with FINRA member firm Morgan Stanley from December 2009 to October 2015.
The AWC alleges that between September 2014 and August 2015, a customer identified only as "HL" had complained on three separate occasions to Robinson regarding the amount of commissions that Robinson charged. The AWC states that:
Rather than bring the customer's complaints to the attention of the Firm, Robinson settled the complaints by issuing three checks in the total amount of $12,203.23 to the customer's wife.
FINRA deemed that Robinson's settlement of the customer's complaints without his firm's knowledge or approval constituted violations of FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Robinson a $10,000 fine and a 15-business-day suspension from association with any FINRA member firm in any and all capacities.
Bill Singer's Comment
According to online FINRA BrokerCheck records as of September 11, 2017, under the heading "Employment Separation After Allegations," on October 6, 2015, FINRA member firm Morgan Stanley "discharged" Robinson based upon:
Allegations involving unapproved fee reimbursements made to a client
This AWC raises an interesting issue as to whether or not Robinson had failed to disclose a settlement of a customer "complaint," as that latter term is technically defined in FINRA's Rulebook. For those among you who are unfamiliar with the concept of nuance, please understand that I am not questioning whether HL complained, which is clearly the case. What I am examining is whether the communication from HL to Robinson met the industry's definition of a "customer complaint." Pointedly, I am not suggesting that it is a desired industry practice to have registered reps enter into undisclosed settlements with customers. To better understand my point,, consider this FINRA Rule:
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.
Communications Versus Complaints
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.
Is There A "Customer"?
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."
Know Your U4
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:
(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?
The Robinson AWC raises a number of interesting questions not fully answered in the presentations of facts. For starters, even assuming that HL "complained" about excessive commissions, such a dispute does not necessarily involve allegations of forgery, theft, misappropriation, or conversion of funds/securities. Similarly, according to FINRA's online Form U4 Explanation of Terms:
Shall include any conduct directed at or involving a customer which would constitute a violation of: any rules for which a person could be disciplined by any self-regulatory organization; any provision of the Securities Exchange Act of 1934; or any state statute prohibiting fraudulent conduct in connection with the offer, sale or purchase of a security or in connection with the rendering of investment advice.:
Similarly, consider that an online FINRA "Form U4 and U5 Interpretive Questions and Answers" :
Question 14I GenerallyQ1: What constitutes a sales practice violation?A: The term "sales practice violation" is defined in the instructions to the Forms and includes any conduct directed at or involving a customer which would constitute a violation of any rules for which a person could be disciplined by any self-regulatory organization; any provision of the Securities Exchange Act of 1934; or any state statute prohibiting fraudulent conduct in connection with the offer, sale or purchase of a security or in connection with the rendering of investment advice. (02/13/98)
Strictly going by FINRA's rulebook, what are we to make of HL's alleged "complaint" about excessive commissions? Assuming that the customer was unhappy with Morgan Stanley's commission schedule, that doesn't seem to raise any "sales practice violation" by Robinson but would appear to raise dissatisfaction with the member firm's charges. I may be inferring too much on this aspect but that's the fault of the AWC's failure to provide sufficient content and context. Regardless, Robinson did himself no good by writing out $12,203.23 worth of settlement checks to HL's wife; however, even those payments raises further questions because although each may have (or may not have) exceeded the $5,000 settlement threshold for reporting, if each settlement check did not pertain to a "sales practice violation" then such conduct would not necessarily fall under the ambit of Item 14I on the Form U4.
Why did Robinson opt to write out the alleged settlement checks and make them payable to the customer's wife? Why did he think that he would be able to keep such settlements under wraps? All good questions and, unfortunately, they are unanswered by the AWC. As a lawyer who has frequently represented folks with similar problems, I'm not all that puzzled by Robinson's conduct. Some reps figure that it's best to just pay off what they deem "nuisance value" complaints from customers.
How does $12,203.23 become nuisance value? Consider what it would cost to hire a high-priced fellow like me. Also, factor in the likelihood that after you disclose the customer complaint, your broker-dealer may very well make you cough up a chunk of change to compensate the customer. Then there are the in-house reports you need to file about customer complaints and settled customer complaints, and those reports may wind up on the desk of some industry regulators, and those Wall Street cops may demand written explanations and testimony, and that's gonna cost even more in terms of Mr. Singer's expensive lawyering, and even with Singer's battling away for you, you are probably going to have to pay a few thousand dollars in regulatory fines. After that, your CRD file gets marked up and they put all the allegations on your online FINRA BrokerCheck file, which isn't gonna go down all that well with folks you're trying to convert into new customers. Geez . . . writing out a lousy check or two or three for $12,203.23 sure seems cheaper and what's that fancy word? Oh, yeah, quietly paying off the customer is more "expeditious." As to whether any of those possible motivations applied to Robinson is unknown to me and he may have had a whole different explanation for his conduct.
Robinson's BrokerCheck Disclosures
Under Robinson's BrokerCheck file heading as of September 11, 2017, of "Customer Dispute - Closed-No Action/ Withdrawn/Dismissed/Denied," are two disclosures reflecting an allegation in 2005 of an unauthorized sale and another 2005 customer allegation of unauthorized trades/withdrawals. Robinson's employing member firm during 2005, UBS Financial Services Inc., denied both claims in 2006.
Under Robinson's BrokerCheck file heading of "Customer Dispute - Settled" are 6 disclosures.
UBS reported a:
2004 complaint alleging inappropriate and unauthorized trades and the firm settled that claim in 2004 for $20,000 without contribution from Robinson.
2009 complaint arising from Auction Rate Securities transactions and the firm settled that claim for $50,000 without contribution from Robinson. This BrokerCheck disclosure clearly admonishes in pertinent part that:
THIS WAS NOT A SETTLEMENT OF A DISPUTE BETWEEN THE CLIENT AND THE REPRESENTATIVE AND WAS NOT BASED ON THE MERITS OF THE CLIENT'S SPECIFIC CONCERNS OR ANY FINDING OF FAULT OR WRONGDOING BY THE NAMED REPRESENTATIVE.
Morgan Stanley reported a:
2015 complaint alleging that Robinson had provided inaccurate account statement summaries that exaggerated yield and also that Robinson had liquidated securities in an IRA account without authorization. The alleged damages of $426,300 were settled in 2015 for $95,000 without contribution from Robinson.
2015 complaint alleging failure to follow instruction per investment guidelines and the firm settled in 2015 for $4,400 without contribution from Robinson
2015 complaint alleging unsuitability. The alleged damages of $95,000 were settled in 2015 for $54,000 without contribution from Robinson
2016 complaint buy "Client's son-in-law" alleging unsuitability. The firm settled for $6,000 in 2016 without contribution from Robinson
Under the BrokerCheck heading of "Customer Dispute - Award/Judgment" we find that Robinson was named in a 2016 customer complaint alleging breach of fiduciary duty; misrepresentations; unsuitability; failure to supervise; and negligence." The Customer alleged damages of $104,000 and a FINRA Arbitration Panel awarded in May 2017 $29,060 on a joint and several basis between Morgan Stanley and Robinson on the unsuitability claim with a $300 reimbursement for filing fees.
More than anything, today's analysis and commentary is intended to be provocative and a case-study. Clearly, you can't have associated persons settling any customer complaints without disclosing that conduct to the member firm. Even if such non-disclosure may not technically fall under a FINRA rule it is a common enough policy of many businesses and such a practice would, at the very least, violate firm policy. On the other hand, rules are rules and they should only be applied as written.
Ultimately, stockbrokers should wonder why presenting to their firm a customer's unhappiness with charged commissions would or should elicit any blow-back from an industry employer. The most likely response would be for a manager to tell the stockbroker to tell the customer that there will be no commission rebate. Sure, that might prompt an arbitration complaint from the customer or the closing of an account but that too comes with the territory. If it's that valued a customer, a stockbroker might always propose to management that he or she will take a reduced pay-out so as to lower a customer's charges. Before you opt for such a radical reaction, consider your own cable and cellphone bills -- you think that those companies will cut your charges? At some point, however, the Morgan Stanley's of Wall Street will have to ask whether their commission schedule is fueling a loss of business to cheaper competitors. Chalk it all up to free enterprise!