October 11, 2021
In a FINRA Arbitration Statement of Claim filed in August 2021, associated person Claimant Entwistle sought an expungement of information about a settled customer dispute from her Central Registration Depository ("CRD") [Note: Claimant did not contribute to said settlement]. Respondent UBS did not oppose the requested expungement. Although notified of the FINRA Arbitration hearing, the customer at issue did no participated in the expungement hearing; and, further, Respondent UBS did not participate. In the Matter of the Arbitration Between Kathleen M. Entwistle, Claimant, v. UBS Financial Services Inc., Respondent (FINRA Arbitration Award 21-01993)
The Customer's Daughter
In recommending expungement, the sole FINRA Arbitrator made a FINRA Rule 2080 finding that the customer's claim, allegation, or information is factually impossible or clearly erroneous. The Arbitrator offered this thoughtful rationale:
The complaint was an inquiry by the customer's daughter as to whether a trade was
made. There was a conversation on May 13, 2020 between the customer and Claimant
about selling a Blackstone closed end mutual fund in another account that was controlled
by the customer and using a portion of the proceeds to purchase a security (IAU) in the
account at issue which was a discretionary portfolio managed account. The sale required
the customer to sign an authorization of sale which was sent to her on May 13, 2020.
Claimant left her employment at UBS Financial Services ("UBS") on May 22, 2020. The
required authorization was not received by that date. Even if it had, the purchase of the
IAU stock would have been discretionary as to when it would be made.
On May 25, 2020, Claimant notified the customer that she left UBS and gave the
customer the contact information of the person who took over the account. After May 22,
2020, Claimant did not have access to the account and could not effectuate any
transactions in it. Claimant was not notified of the complaint until it was added to her
record. Claimant did not participate in the resolution and did not contribute to it.
The complaint was not made by the customer, but by her daughter who was neither the
customer nor a person authorized to act on the account. The IAU stock was $563.88
higher than it was on May 13, 2020 by May 22, 2020, the date Claimant left UBS. UBS
settled the matter by giving the customer a courtesy credit of $4,860.14, which was the
2020 account management fee charged on the account. In addition to the facts not
supporting the claim, the complaint was not made by the customer or person authorized
to act on the account and was for less than the $5,000 which is the minimum required by
FINRA Rule 4530 for a matter to be recorded on a broker's record.
Bill Singer's Comment
Let's take a look at some pertinent FINRA rules addressing 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, family member, or agent as some common examples). At times, a customer's family member or friend may complain to a 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."
The Entwistle Expungement
What should have jumped out at you about Entwistle is that there was no customer complaint:
The complaint was an inquiry by the customer's daughter as to whether a trade was made. . . . The complaint was not made by the customer, but by her daughter who was neither the customer nor a person authorized to act on the account.
Without question, the customer did not make the complaint -- her daughter did. Further, there wasn't even a "complaint," but, in contradistinction, there was an "inquiry." Making matters worse, some idiot at UBS apparently filed a FINRA Rule 4530 report, which wound up besmirching Claimant Entwistle's reputation:
In addition to the facts not supporting the claim, the complaint was not made by the customer or person authorized to act on the account and was for less than the $5,000 which is the minimum required by FINRA Rule 4530 for a matter to be recorded on a broker's record.
Accordingly, we have a non-customer inquiry filed with FINRA as a customer complaint, and, further, the damages alleged did not rise to the threshold at which a Rule 4530 report would have been triggered. Other than that, UBS did everything it was supposed to but for the fact that it did nothing it was supposed to.
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 Entwistle . . and leaving it over a year on her CRD? Who exercised common sense? How could so many folks reference the same FINRA rules yet come away with such different conclusions?
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 Entwistle had to go through the legal fiction of suing her 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
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- Sexual Bondage, Videotapes, Divorce, Criminal Charges, Revenge Porn and FINRA (BrokeAndBroker.com Blog /February 26, 2020)
- FINRA Settles Case Involving What Looks Like A Felony But Isn't (BrokeAndBroker.com Blog /January 17, 2020
- FINRA Issues An Extraordinary and Cynical Release (BrokeAndBroker.com Blog /July 12, 2019)
- 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