August 19, 2020
In today's featured FINRA intra-industry arbitration, a member firm allegedly posted a "customer complaint" on a rep's industry record. In response, the rep hired a lawyer and apparently incurred the expense of time and money to right what he thought was a wrong. After you read through the FINRA Arbitration Panel's findings, you sort of appreciate how pissed off the rep likely was. After all, the arbitrators found that the customer had never complained about the rep, but, in fact, had complained about the brokerage firm and another rep. Worse, the arbitrators found that the rep didn't do jack when it came to any aspect of the complained about transactions. All of which might explain why the rep sued his former brokerage employer.
Case In Point
In a FINRA Arbitration Statement of Claim filed in May 2019 and as amended, associated person Claimant Gilbert asserted defamation and sought the expungement of customer dispute information from his Central Registration Depository files ("CRD"). Claimant Gilbert sought over $100,000 but less than $500,000 in compensatory damages, punitive damages, costs, and fees. In the Matter of the Arbitration Between Gary George Gilbert, Claimant, v. Capital Financial Services, Inc., Respondent (FINRA Arbitration Award 19-01377)
FINRA member firm Respondent Capital Financial Services generally denied the allegation, asserted various affirmative defenses, and filed a Counterclaim asserting fraud and misrepresentation. Respondent sought over $100,000 but less than $500,000 in compensatory damages, punitive damages, costs, and fees.
In characterizing the underlying issues, the FINRA Arbitration Award asserts that Claimant Gilbert alleged that Respondent Capital Financial had defamed him when the firm allegedly "falsely reported a customer dispute on his registration records." In its Counterclaim, Capital Financial alleged that "Claimant fraudulently asserted that the customer in the underlying dispute was his client and that Claimant had done the analysis and review of the investment that became the subject of the customer's complaint."
The Virtual Hearing
In COVID-related development, the FINRA Arbitration Award asserts in pertinent part:
On April 7, 2020, Claimant filed a Motion to Compel a Virtual Final Hearing in May 2020
("Motion to Compel a Virtual Hearing"). On April 17, 2020, Respondent filed a
Response and Objections to the Motion to Compel a Virtual Hearing. On April 20, 2020,
Claimant filed a Reply in Support of the Motion to Compel a Virtual Hearing. The Panel
heard oral arguments on the Motion to Compel a Virtual Hearing on April 22, 2020 and
the parties and Panel agreed to hearing dates in July. In its Order dated the same day,
the Panel ordered that the hearing would proceed via videoconference, in the event that
all July in-person hearings were administratively cancelled by FINRA due to COVID-19.
The Panel noted that the parties appeared at the evidentiary hearing held via
videoconference on July 7-8, 2020.
On July 9, 2020, Claimant advised that the customer in Occurrence Number 1997702
("Customer") was served with the Statement of Claim and notice of the date and time
of the expungement hearing.
The Panel conducted a recorded, videoconference hearing on July 24, 2020, so the
parties could present oral argument and evidence on Claimant's request for
The FINRA Arbitration Panel found Respondent Capital Financial Services liable to and ordered the firm to pay to Claimant Gilbert:
- $40,000 in compensatory on his defamation claim;
- $40,000 in punitive damages pursuant to Minn. Stat. Section 549.20 https://www.revisor.mn.gov/statutes/cite/549.20;
- $3,000 in FINRA Code of Arbitration Procedure sanctions per FINRA Rules 13212 and 13511; and
- $300 in non-refundable FINRA filing fees
Additionally, the panel recommended the expungement of the customer complaint based upon a Rule 2080 finding that the customer's claim, allegation, or information is factually impossible or clearly erroneous; and that Claimant Gilbert was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds. In recommending expungement, the Panel offered this rationale:
Claimant was never the subject of the Customer's complaint. The Customer's
claims were directed against Respondent and a different broker. Claimant was
not involved in or responsible for, in any way, the underlying transactions that
the Customer complained about. Claimant did not recommend or execute the
sales of the products the Customer complained about. Claimant was not
informed of the Customer's claim until Respondent requested contribution from
Claimant (which request was denied). Respondent added Claimant to the
settlement agreement (in the Customer's underlying dispute) without
Claimant's knowledge or consent.
Bill Singer's Comment
A sign of these COVID pandemic times: the virtual FINRA Arbitration hearing. Of course the $83,000 or so in damages and sanctions ain't all that virtual.
The key issue in this expungement case involves distinguishing between a non-disclosable customer communication and a disclosable customer complaint, and then deciding who was the intended subject of the "complaint." All of which presents some interesting issues for in-house compliance staff. The mere fact that there is a customer and that individual has filed a complaint does not automatically transform that customer complaint into one about the customer's servicing stockbroker -- nor does it justify any compliance officer's decision to automatically deem that any complaint from any customer is filed naming the current, servicing stockbroker. Such a compliance protocol is lazy. It's sloppy. Frankly, it's borderline fraud, which could also be viewed as potential defamation, and certainly little more than going through the motions rather than doing your job in good faith. As such, 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 communication as a complaint against Gilbert. . . and leaving it for years on his CRD? Who exercised common sense? How could so many folks reference the same FINRA rules yet come away with such different conclusions? Let's consider these stark words from the FINRA Arbitration Awards:
Claimant was never the subject of the Customer's complaint. The Customer's claims were directed against Respondent and a different broker. Claimant was not involved in or responsible for, in any way, the underlying transactions that the Customer complained about. Claimant did not recommend or execute the sales of the products the Customer complained about. . . .
In the spirit of beating a horse to death, let me set the Panel's findings in bullet-point fashion:
Claimant Gilbert was never the subject of the Customer's complaint.
The Customer's claims were directed against Broker-Dealer Capital Financial Services and another stockbroker.
Claimant Gilbert was not involved in or responsible for, in any way, the underlying transactions.
Claimant Gilbert did not recommend or execute the sales of the products the Customer complained about.
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 Gilbert 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.com Blog / January 29, 2019)
- Son Calls FINRA Senior Helpline About Trading In Mom's Account (BrokeAndBroker.com Blog / November 27, 2018)
- 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
READ the BrokeAndBroker.com Blog "Expungement" Archive