December 8, 2017
It's another day in the Compliance Department on Wall Street and the mail has just arrived. We got a few letters that are clearly coming from unhappy campers. Time to get out the old rubber stamp and mark them "RCVD" and enter the data into the online "Customer Complaint" file. Next, we notify the registered rep involved. Next, we arrange to amend the rep's Form U4 and to notify FINRA of the regulatory disclosable event. Ho hum . . . stamp . . . type . . . send. That's the compliance assembly line. The problem is whether all that stamping and processing is going on a tad too quickly and without someone asking whether the correspondence contains a "grievance" from a "customer." Why do those questions matter? Consider today's featured FINRA arbitration.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in October 2016, Claimant Lee asserted negligence and responsibility under the doctrine of respondeat superior. As set forth in the FINRA Arbitration Decision:
The causes of action relate to Respondents' alleged failure to designate Claimant as the beneficiary to an IRA account belonging to her late-husband.
Claimant sought the alleged amount of the IRA at issue, which was alleged to be $135,373.76, plus attorneys' fee and costs. In the Matter of the FINRA Arbitration Between Mary C. Lee, Claimant, vs. AXA Advisors, LLC, Larry Dan George, and William Paul Evans, Respondents (FINRA Arbitration 16-03173, December 5, 2017).
Respondents generally denied the allegations and asserted various affirmative defenses, and sought the expungement of this matter from all Central Registration Depository records ("CRD").
Challenging FINRA Jurisdiction
On May 31, 2017, Respondents moved the FINRA Arbitration Panel to find that Claimant Lee's claims are not subject to FINRA arbitration because the organization lacks jurisdiction under FINRA Rule 12200. In their motion, Respondents George and Evans argued that Lee is not a customer of either of them.
FINRA Code of Arbitration Procedure for Customer Disputes Rule 12200: Arbitration Under an Arbitration Agreement or the Rules of FINRA
Parties must arbitrate a dispute under the Code if:
- Arbitration under the Code is either:
(1) Required by a written agreement, or
(2) Requested by the customer;
- The dispute is between a customer and a member or associated person of a member; and
- The dispute arises in connection with the business activities of the member or the associated person, except disputes involving the insurance business activities of a member that is also an insurance company.
Not Standing Up
Following briefing by the parties, on November 10, 2017, the arbitrators heard oral argument and granted Respondents' motions pursuant to this rationale:
Claimant brought this action on her own behalf. Claimant was not a customer of Respondents, nor did she purchase any goods or services from Respondents. Claimant represented that she is not the Executor or Administrator of her husband's estate. Claimant has no standing to bring this claim in FINRA arbitration, either on her own behalf or on behalf of her deceased husband.
Good for the Goose But Not So Good For The Gander
In an interesting twist, the Panel declined to hear the requests for CRD expungement because the arbitrators deemed that their lack of jurisdiction over the underlying arbitration claim precluded them from finding jurisdiction to entertain the expungement request.
Bill Singer's Comment
Compliments to this FINRA Arbitration Panel for an excellent job of tackling the "definition of customer" issue and the ramifications of that predicate consideration of that attachment of jurisdiction.
For a superb analysis of some of the issues raised in Lee v. AXA, read:
"Who Is A Customer For Purposes Of FINRA Arbitration Rule 12200" (BrokeAndBroker.com Blog, Guest Blog by Martin P. Unger, Partner, Wexler Burkhart Hirschberg & Unger, LLP / September 16, 2016)
Regulatory Reporting of Customer Complaints
An interesting question prompted by Lee v. AXA is whether Claimant Lee filed a "reportable" complaint for FINRA regulatory purposes. Consider these FINRA regulatory rules [Ed: highlighting added]:
FINRA Rule 4513: Records of Written Customer Complaints
(a) Each member shall keep and preserve in each office of supervisory jurisdiction either a separate file of all written customer complaints that relate to that office (including complaints that relate to activities supervised from that office) and action taken by the member, if any, or a separate record of such complaints and a clear reference to the files in that office containing the correspondence connected with such complaints. Rather than keep and preserve the customer complaint records required under this Rule at the office of supervisory jurisdiction, the member may choose to make them promptly available at that office, upon request of FINRA. Customer complaint records shall be preserved for a period of at least four years.
(b) For purposes of this Rule, "customer complaint" means any grievance by a customer or any person authorized to act on behalf of the customer involving the activities of the member or a person associated with the member in connection with the solicitation or execution of any transaction or the disposition of securities or funds of that customer.
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.
As with far too many rules that bedevil virtually every regulated industry, we find that the definition of what constitutes a reportable "complaint" requires us to first figure out just what constitutes a "grievance," which is not defined in the FINRA Rulebook.
Communication or Complaint?
FINRA member firm compliance departments uniformly characterize 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.
Customer Or Not?
Additionally, even if a communication involves what may be deemed a 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 complain to an employer brokerage firm about a stockbroker who is servicing the subject customer. If the sender of that complaint is not the customer and not a "person authorized to act on behalf of the 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.
Oral or Written?
A peculiar quirk of FINRA's rules is that the self-regulator's reporting requirements require the prompt reporting of "any written complaint" but 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."
As if any normal human being would not, by now, be crumbling under the weight of FINRA's rules and their lack of meaningful guidance, you have to add to that pressing weight the need to discern 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, in part, the following:
(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?
Ah yes, the regulatory minefield for the unwary:
FINRA Rule 4530(a)(1)(B) requires prompt reporting when an associated person is "the subject of any written customer complaint involving allegations of theft or misappropriation of funds or securities or of forgery."
Form U4, Item 14I (2) requires reporting of both written and oral investment-related, consumer-initiated complaints alleging a sales practice violation that settled for $15,000 or more.
To add to the confusion, Item 14I(3) on the U4 requires the reporting of only written investment-related, consumer initiated complaints made within the past 24-months alleging at least $5,000 in compensatory damages; but if no monetary 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." On the other hand, if that same 24-month-complaint merely alleged that "you were involved in forgery, theft, misappropriation or conversion of funds or securities," then it has to be disclosed regardless of the dollars alleged.