That Customer Complaint May Not Be A FINRA Reportable Event

December 4, 2015

Not all customer communications are necessarily "complaints;" and, not all complaints pertaining to customer accounts are prepared and sent by the customer. Two seemingly obvious points. Ahhh . . . but it's how we interpret the underlying facts and circumstances that often makes all the difference in Wall Street regulation. Similarly, who is responsible for detecting an event that doesn't need to be reported or one that does may often explain why a compliance person is the Chief Compliance Officer versus a mere in-house examiner or why one industry lawyer is paid $250 an hour and another $600 an hour. Then again, there are a lot of morons who rise to managerial ranks and who has not heard the horror stories about over-priced lawyers?

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in December 2014, associated person Claimant Hartman asserted breach of contract, breach of equitable and just principles of trade, negligence, and filing of misleading information as to membership or registration. The causes of action relate to Claimant's allegation that Respondent VFG Securities had improperly submitted regulatory disclosures pertaining to Hartman when, in fact, the underlying event did not so require. At issue was a purported September 22, 2010 customer "complaint" made by alleged customers Mr. BH and Mrs. LH ("BH and LH Complaint"). In addition to seeking an expungement of the customer matter from his Central Registration Depository file ("CRD"), Claimant sought compensatory damages, among which were lost earnings, future earnings, benefits and other remuneration. Additionally, Claimant Hartman sought attorneys' fees, expert witness fees, costs, and disbursements; interest, and forum fees. In the Matter of the FINRA Arbitration Between Tony M. Hartman, Claimants, vs. VFG Securities, Inc., Respondent (FINRA Arbitration 14-03803, November 23, 2015).

Respondent VFG generally denied the allegations and asserted various affirmative defenses; however, Respondent took no position with respect to the requested expungement.


On June 23, 2015, Claimant advised FINRA that the parties had settled the matter and he requested an expungement hearing. As noted in the FINRA Arbitration Decision:

On November 3, 2015, Claimant filed an unopposed brief on whether the customer in an underlying dispute must be notified of a registered person's request for expungement relief. The Arbitrator finds that narrow circumstances discovered through case information and by testimony during the hearings persuade him to allow Claimant relief from FINRA's expanded expungement guidance that suggests associated person(s) provide a copy of their Statement of Claim to the customer involved in an underlying arbitration.

The Arbitrator determined that no settlement agreement exists with relation to the BH and LH Complaint.

Expungement Recommendation

In recommending expungement, the sole FINRA Arbitrator explained that:

Claimant testified and demonstrated his method of introducing clients to potential investments: group meetings. individual sessions, careful explanations about each investment being suggested, and individual sessions with each potential client prior to sale. This method allowed each client several choices for their portfolio. The customer, BH, identified In the Statement of Claim, complained to the Respondent directly and made accusations that are inaccurate and unsubstantiated. As a matter of fact, the product was sold to LH for inclusion into her Individual Retirement Account ("IRA"). LH is the wife of BH and is a participant in other investments purchased through Claimant. This fact may cause BH to have no standing as a complainant about Claimant and his dealings with LH and her IRA Investments.

Another peculiar Issue regarding this claim is the fact that no written complaint from BH, or anyone elss is known to exist. A phone call from BH to Suzanne Bond, an officer of Respondent's, caused Ms. Bond to speak with FINRA regulation about this issue. Ms. Bond, representing Respondent, then filed a report that became part of the CRD record of Claimant.

A careful review by the Arbitrator of the New Account Form indicates no abuse of LH's Investment Objectives. These forms were completed at the time of the investment by LH.

Bill Singer's Comment

Compliments to the sole FINRA Arbitrator for providing us with sufficient content and context to make sense of the expungement recommendation. The rationale shows a commendable effort to parse through the many nuances of customer communications and to arrive at a conclusion based upon sound reasoning.

A number of issues jump out at me in this arbitration.  For starters, consider, in pertinent part, FINRA's rule concerning the disclosure of reportable events:

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.

According to FINRA Rule 4530, not every communication from a customer is a "complaint." Among the more common errors that I see many member firm compliance departments commit is to uniformly treat 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 reportable 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 send to an employer firm a complaint against a stockbroker.  If the sender of that complaint is not a 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.

Many industry participants do not necessarily consider whether a customer communication voicing a complaint is in "oral" or "written" form. A peculiar quirk of FINRA's rules is that the self-regulator's reporting requirements require the prompt reporting of "any written complaint" and 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."

Always be mindful, however, of the difference 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 the following Item 14I questions:

(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?

Also READ: "FINRA Complains About CCO Complaint Reporting" ( Blog, October 29, 2015)