August 29, 2019
A Morgan Stanley customer surrendered her annuity. About a year after the surrender, the customer's nephew complains that that the transaction was unsuitable for his aunt. The aunt didn't complain to Morgan Stanley -- only her nephew did. In response, Morgan Stanley denied the claim without offering any settlement whatsoever from either the firm or the stockbroker. Notwithstanding those facts, Morgan Stanley reported the matter as a "customer complaint" and marked up the stockbroker's industry record.
Case In Point
In a FINRA Arbitration Statement of Claim filed in June 2018, associated person Claimant Miramontes sought the expungement of a customer complaint from his Central Registration Depository record ("CRD"). Respondent Morgan Stanley did not oppose the requested relief. Although notified of the expungement request and hearing, the customer did not participate in the hearing. In the Matter of the Arbitration Between Isidro Z. Miramontes, Claimant, v. Morgan Stanley & Co., LLC, Respondent (FINRA Arbitration Decision 18-02144) http://www.finra.org/sites/default/files/aao_documents/18-02144.pdf
Following a hearing, the sole FINRA Arbitrator recommended the expungement of the customer complaint from Claimant Miramontes' CRD based upon a FINRA Rule 2080 finding that the customer's claim, allegation, or information is false. As set forth in the Arbitrator's rationale:
The Arbitrator found that it was abundantly clear that written disclosures were made to the Customer, a competent investor, for the suitable investment. Claimant persuasively testified that he tried to dissuade the Customer from surrendering the annuity because of taxes and a surrender charge. A year later, the Customer did so anyway.
The Underlying Complaint was made by the Customer's nephew and not the Customer, herself. Based on Claimant's testimony, the Arbitrator was persuaded that the Customer's nephew (who had a financial interest in obtaining his aunt's money) made the Underlying Complaint to attempt to coerce money from Respondent for the nephew's own purposes, and not an attempt to act for or to protect his aunt. The Customer never complained and never pursued her nephew's complaint after Respondent denied it. Since the written disclosures and Claimant's testimony contradicts the Underlying Complaint, it should be expunged.
Bill Singer's Comment
Compliments to the sole FINRA Public Arbitrator Kirtley M. Thiesmeyer for a brief yet concise Decision replete with sufficient content and context to render her findings intelligible. Nice job!
Let's take a look at some pertinent FINRA rules addressing the nature of customer complaints:
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 . . .
. . .
(d) Each member shall report to FINRA statistical and summary information regarding written customer complaints in such detail as FINRA shall specify by the 15th day of the month following the calendar quarter in which customer complaints are received by the member.
(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
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 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.
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 office with the need to figure out just what constitutes a "grievance."
In today's FINRA Arbitration, who in that mix of facts was reasonable when it came to reporting the customer's nephew's communication as a complaint . . . and leaving it for years on Miramonte's CRD unamended? Who exercised common sense? How could so many folks reference the same FINRA rules yet come away with such different conclusions? As the FINRA Arbitrator found: "The Customer never complained and never pursued her nephew's complaint after Respondent denied it."
The Customer never complained! And how the hell, then, did that generate a disclosure about a customer complaint?
Of course, if you carefully read the language of Item 14 in the Form U4, you would have noted that instead of a "customer" initiated sales practice violation, that form uses "consumer" initiated. What the hell is the difference between a "customer" and a "consumer" you might ask. Great question. As explained in part in "Form U4 and U5 Interpretive Questions and Answers
" (FINRA.org) https://www.finra.org/sites/default/files/Interpretive-Guidance-final-03.05.15.pdf:
Q2: Who is included in the term "consumer"?
A: The term includes a current, former, or prospective customer or a person who can act for such person
by law or contract, including an executor, conservator, or a person holding a power of attorney. An
example of a person who is not a "consumer" is a customer's relative who does not hold a power of
I could go on and on with the back-and-forth analysis but it's not going to be much more than an academic exercise. Ultimately, it just doesn't seem right that Miramontes had to go through the legal fiction of suing his employer and incurring legal fees to revise the disclosure at issue. I would like to think that common sense would compel us all to agree that a mere telephone call to FINRA with follow-up supporting documentation could have carried the day -- but for the fact that FINRA remains an often impenetrable bureaucracy bereft of common sense or the motivation to drain its swamp.
Download a PDF copy of Bill Singer Esq.'s analysis of FINRA's Expungement Rules
- Unsettled Settlement of Managed Account Goof Prompts FINRA Expungement (BrokeAndBroker.comd Blog January 29, 2019)
- Was That Stockbroker's Customer Blowing Steam Or Making A Complaint? (BrokeAndBroker.com Blog, May 11, 2018)
- Was That Customer Email A Discussion, Grievance, Or Complaint? (BrokeAndBroker.com Blog, November 2, 2017)
- "Brokerage Customer Says That What Looks Like A Complaint Wasn't So Intended" (BrokeAndBroker.com Blog, October 19, 2017
- "That Customer Complaint May Not Be A FINRA Reportable Event" (BrokeAndBroker.com Blog, December 4, 2015)
- "FINRA Complains About CCO Complaint Reporting" (BrokeAndBroker.com Blog, October 29, 2015)
FINRA Rule 2080: Obtaining Customer Dispute Expungement
FINRA Rule 2081: Prohibited Conditions Relating to Expungement of Customer Dispute
FINRA Rules 12805 and 13805: Expunging Customer-Dispute Information Under Rule 2080