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Brokerage Customer Says That What Looks Like A Complaint Wasn't So Intended
October 19, 2017
You tell me: What constitutes a "Complaint."
Okay, fine, let's go with your definition.
Now, what happens if a brokerage firm customer sends a letter to the firm indicating that he was disappointed in his account's performance? Using your definition of a complaint, is that customer's letter a "Complaint?"
Next, what happens if you are a compliance officer at the brokerage firm and you read the customer's letter questioning his account's performance? Should that compliance officer deem the letter as constituting a reportable customer complaint?
No, don't go anywhere, I got one more twist for you, what happens if the customer says that the letter was never intended to be viewed as a "formal" complaint?
Today's BrokeAndBroker.com Blog tackles the fascinating issue of whether a letter from a customer that seems to be a "complaint," is, in fact, a complaint in light of the customer's renunication of any such intent.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in December 2016, Claimant Soukup sought the expungement of a customer complaint that had been entered into his Central Registration Depository records ("CRD") by Respondent Citigroup Global Markets, Inc. In specific, Claimant requested the expungement of a reference to a letter sent by a public customer to Citigroup in 2002. As stated in the FINRA Arbitration Decision, that 2002 letter purportedly stated that:
The client alleged unauthorized trading and that he never agreed to the use of margin in his account. August 2000 through November 2001. Alleged damages unspecified.
In the Matter of the FINRA Arbitration Between Mark Alexander Soukup, Claimant, vs. Citigroup Global Markets, Inc., Respondent (FINRA Arbitration 17-00040, October 16, 2017).
Non-Opposition
Respondent Citigroup did not oppose Claimant Soukup's request for expungement but requested that all fees be assessed to Claimant.
The customer in the underlying complaint participated in the expungement hearing and contested the request for expungement.
Lack of Intention
The Sole FINRA Arbitrator recommended the expungement of the customer complaint from Claimant Soukup's CRD based upon his finding that the customer's claim was factually impossible or clearly erroneous and false. The Arbitrator assessed Claimant with $1,350 in fees for the three in hearing sessions. As more fully explained by the Arbitrator:
The day after Citigroup received that letter, Claimant called the customer and asked if he was filing a formal complaint. The customer answered that he did not intend to file a formal complaint but wrote the letter because he was disappointed in the performance of his account. The customer never filed a formal complaint of any kind, never filed a complaint with FINRA, and never filed litigation. Citigroup reported the matter to the CRD as a customer complaint. Both Claimant and the customer testified at the hearing that the customer told Claimant that he did not intend to file a complaint and that the customer never did file a complaint.Although this matter was sent to the CRD, it was not available to the public through BrokerCheck. However, after FINRA amended Rule 8312 in 2010 to require disclosure of historic complaints, this complaint became visible to the public. Claimant testified that the availability of this information on BrokerCheck has caused him to lose business.Claimant presented into evidence (Claimant's Exhibit 2) the account application and client agreement for the customer and his wife. The customer testified that this was the agreement he signed and that the signature on the agreement was his.That agreement contained a section entitled "Borrowing Privilege". It provided:
Portfolio CreditLine allows you to borrow against the value of eligible securities in your account for almost any investment, personal or business purpose. Eligible accounts will have Portfolio CreditLine borrowing privilege unless you decline below.
Below that was a checkbox with the legend, "I/We do not want Portfolio CreditLine borrowing privileges in my/our account." The box was not checked.On page 4 of the agreement was a section entitled "Margin Agreement." This section expressly authorized Citigroup to maintain the customer's account as a margin account.The CRD record indicates that the customer alleged unauthorized trading and that he never agreed to the use of margin in his account. The evidence presented at the expungement hearing was uncontroverted that the customer did, in fact, agree to the use of margin and that no unauthorized trading occurred.
Bill Singer's Comment
By way of context, online FINRA BrokerCheck records as of October 19, 2017, disclose that Soukup was first registered in 1988. BrokerCheck states that Soukup has 27 years of industry experience with five member firms (I appreciate the discrepancy between the 1988 first registration and the "27 years" but I can only report what I find). I'm guessing that the blot on his record involving a letter written some 15 years ago by his customer was a festering sore.
The underlying customer issue is certainly an oddity. It involves the distinction between a customer communication and a customer complaint and a "formal" customer complaint. As set forth in the FINRA Arbitration Decision:
The day after Citigroup received that letter, Claimant called the customer and asked if he was filing a formal complaint. The customer answered that he did not intend to file a formal complaint but wrote the letter because he was disappointed in the performance of his account. The customer never filed a formal complaint of any kind, never filed a complaint with FINRA, and never filed litigation. Citigroup reported the matter to the CRD as a customer complaint. Both Claimant and the customer testified at the hearing that the customer told Claimant that he did not intend to file a complaint and that the customer never did file a complaint.
Okay . . . sure . . . ummm . . . what? Citigroup receives a "letter," which is characterized in those neutral terms. Soukop asks the customer if the letter was intended to constitute a "formal complaint," which the customer says was not his intent. What should Citigroup apparently do with that explanation?
In fairness to Citigroup, although the customer told the stockbroker that the letter was not intended to serve as a complaint, that same customer stated that he was "disappointed in the performance of his account," which, you know, sure as hell seems to be a "complaint." Perhaps erring on the side of caution in the exercise of what it saw as its compliance and regulatory duty, Citigroup characterized the customer's letter as a reportable complaint notwithstanding the customer's protestations to the contrary.
Now, let's take a look at a pertinent FINRA rule addressing the nature of customer complaints:
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, 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 the 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." This disclosure is prompted by written-only complaints.
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. So you do have to report some "oral" complaints on the U4.
To add to the confusion, Item 14I(3) 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.
Also READ:
- "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)
Download a PDF copy of Bill Singer Esq.'s analysis of FINRA's Expungement Rules