We raise the curtain on a husband and wife headed for divorce. He is a stockbroker. She is a customer. She is not an actual customer. She is not a customer. This shape-shifter-customer-not-a-customer is certainly an estranged wife headed for divorce. The husband's brokerage firm marks up his industry record with the wife's allegations of misconduct. Apparently the divorce court didn't believe her allegations; and apparently, the sole FINRA Arbitrator hearing the husband's expungement request didn't either. They better try this one out of town before hitting Broadway. The audience may get lost in Act I and never catch the drift thereafter.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in February 2018, and as amended, associated person Claimant Anthony DiBernardo sought the expungement of a complaint (referenced in the FINRA Arbitration Decision as "Occurrence Number 1563068") from his Central Registration Depository records ("CRD") records. Claimant DiBernardo sought $1 in compensatory damages. In the Matter of the FINRA Arbitration Between Anthony DiBernardo, Claimant,and Transamerica Financial Advisors, Inc., Respondent (FINRA Arbitration 18-00779, November 21, 2018)
Respondent Transamerica took no position as to whether Claimant is entitled to the requested expungement but objected to any monetary relief. At the hearing, Claimant DiBernardo withdrew his request for $1 in damages.
Ms. DiBernardo the "Customer"
Under the heading "Other Issues Considered and Decided," the FINRA Arbitration Decision asserts in part that:
On September 10, 2018, Claimant provided notice that the Statement of Claim and
notice of the expungement hearing had been served on Ms. DiBernardo, the customer
in the Underlying Complaint.
So . . . we're apparently dealing with a "Customer Complaint," right? Okay, hold that thought.
The Decision further asserts that:
Pursuant to Rule 13805 of the Code of Arbitration Procedure ("Code"), the Arbitrator
has made the following Rule 2080 affirmative findings of fact:
The claim, allegation, or information is factually impossible or clearly erroneous.
The registered person was not involved in the alleged investment-related sales
practice violation, forgery, theft, misappropriation, or conversion of funds.
The claim, allegation, or information is false.
So . . . let's recap, again.
Ms. DiBernardo is "the customer in the Underlying Complaint."
The sole FINRA Arbitrator rendered a FINRA Rule 13805: Expungement of Customer Dispute Information under Rule 2080, and that rule is titled: "Expungement of Customer Dispute Information."
an expungement request to remove a customer's complaint; and
the arbitrator is conducting the hearing pursuant to FINRA's customer dispute rules.
So, okay, we're apparently dealing with a customer complaint, right?
Again, hold that thought.
The sole FINRA Arbitrator recommends the requested expungement and offers this rationale:
Ms. DiBernardo was the wife, not a customer, of Claimant, and given the
surrounding circumstances, it appears the allegation was falsely made to gain a
tactical advantage in the divorce proceedings that were pending between the
parties. Claimant testified that the allegations made by the accuser were the
subject of a court hearing and that the Court found the allegations to be false. No
evidence was presented to support the allegations.
Accordingly, Claimant has met the standard for expungement for Occurrence
Number 1563068. Expungement is warranted pursuant to FINRA Rule 2080(b)(1)(B) -- that Claimant was not involved with an alleged sales practice
violation. The accusing "customer", Ms. DiBernardo, was not an actual customer
of the Claimant nor the Respondent, there were never any transactions made on
her behalf, and there was no alleged sales practice violation. Further,
expungement also is warranted pursuant to FINRA Rule 2080(b)(1)(A) and (C) -- that the allegations are clearly erroneous or factually impossible, or false. The
evidence has shown that Claimant took a loan in his own account with Ms.
DiBernardo's permission and did not forge her signature, as alleged.
Bill Singer's Comment
Howsabout we all take another look at this:
Ms. DiBernardo was the wife, not a customer, of Claimant . . . The accusing "customer", Ms. DiBernardo, was not an actual customer of the Claimant nor the Respondent, there were never any transactions made on her behalf, and there was no alleged sales practice violation.
The wife is not a customer but she is an accusing customer although not an actual customer and neither her husband the stockbroker nor his employer the brokerage firm executed any transactions for her and even if they had, there was no sales practice violation.
Omigod -- get me a case of aspirin!
According to online FINRA BrokerCheck records as of December 5, 2018, Ms. DiBernardo apparently alleged that her husband took out a loan on his variable life insurance policy and allegedly forged her name on a loan request letter. The wife appears to have asserted that the couple lived in a "community property state," and that somehow obligated her husband to first obtain her permission to engage in the cited acts. Claimant DiBernardo vehemently denied his estranged wife's allegations. As noted in the FINRA Arbitration Decision:
[I]t appears the allegation was falsely made to gain a tactical advantage in the divorce proceedings that were pending between the parties. Claimant testified that the allegations made by the accuser were the subject of a court hearing and that the Court found the allegations to be false. No evidence was presented to support the allegations.
My curiosity is piqued as to why (or whether) Transamerica made the compliance decision to post a regulatory disclosure characterizing Ms. DiBernardo's communications as customer complaints because it appears that the firm concluded that the wife was not a customer. I'm also unclear as to why Transamerica didn't update its earlier disclosure and seek FINRA's permission to remove the disclosure. In fairness to Transamerica, FINRA's rulebook isn't all that helpful when trying to determine who is and isn't a customer, and what does and doesn't necessarily arise to the level of a "complaint" rather than a mere "communication." Consider the following:
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.
I keep hearing the FINRA Arbitration Decision's refrain that Ms. DiBernardo, was not an actual customer of Claimant Anthony DiBernardo nor of Respondent Transamerica, and that neither the stockbroker nor his employer brokerage firm executed any transactions on the wife's behalf; and even taking her allegations at face value, they did not rise to the level of alleged sales practice violations. Mind you, those are not my opinions but the findings of an independent FINRA arbitrator.
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.
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.
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 writteninvestment-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.
Yeah, I know, that's all crystal clear. The important takeaway is that FINRA's regulatory scheme assumes too much and depends upon unmanageable notions such as common sense and reasonableness. Common sense? Reasonableness? Try referencing those concepts if you're a registered rep, associated person, or compliance officer with the need to figure out just what constitutes a "grievance" and whether the complainant is a customer or a consumer or merely visiting from a nearby planet or distant galaxy. For FINRA's legion of apologists and self-serving lackeys, go ahead, criticize my analysis all you want. Just keep in mind that an independent FINRA Arbitrator found that Claimant DiBernardo's wife was NOT a customer and that her communications did NOT allege any sales-practice violations.