Was That Stockbroker's Customer Blowing Steam Or Making a Complaint?

May 11, 2018

Listen . . . I'm not happy with my REIT investment . . . damn thing is illiquid . . . get me out of that dog as soon as you can.

Okay, so, put your FINRA regulatory thinking caps on. If you are a stockbroker and you get the above in an email from a customer, would you deem the language to constitute a "complaint"? If you disclose that email on all of your industry records as a complaint, it will be seen as a mark against you because, well, you know, it's a customer complaint. What part of the email is actually complaining about anything that the stockbroker did versus the toxic nature of an investment? Does that matter? Should it matter?

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in November 2017, Claimant Claimant Rebecca Susan Kennell sought the expungement of a customer complaint (the customer is now deceased) from her Central Registration Depository records ("CRD") and $1 in compensatory damages. In the Matter of the FINRA Arbitration Between Claimant Rebecca Susan Kennell, Claimant, vs. Commonwealth Financial Network, Respondent (FINRA Arbitration : 17-02935,May 3, 2018).

Respondent Commonwealth Financial Network did not file the Statement of Answer and did not participate in the expungement hearing. 

Expungement Recommendation

The sole FINRA Arbitrator denied the request for $1 in damages but recommended the expungement of the customer complaint. In making that recommendation, the FINRA Arbitrator made a FINRA Rule 2080 finding that the claim, allegation, or information is factually impossible or clearly erroneous. In presenting his rationale, the Arbitrator offered this lucid and compelling rationale:
  • The complaint did not arise from the Customer, but rather from a finding by regulators that the Customer's email comments to Claimant about wanting to get out of the investment as soon as possible constituted a complaint. 
  • Claimant gave the Customer's comments to her compliance department, which said that these did not constitute a complaint and took no further action. 
  • Later, regulators conducting a review of Respondent's compliance department determined that the Customer's comments should be taken as a complaint. However, since the Customer had earlier acknowledged the illiquid nature of the investment, Respondent took no action. 
  • Nonetheless, Respondent's compliance department told Claimant in 2010 that it had no choice but to file the complaint on Claimant's CRD report. The Customer died in 2013. 
  • Claimant also spoke at the hearing, but not under oath. She mentioned that she believed this case was not a complaint about a broker as that term is normally interpreted but was instead a comment by her client complaining about the condition of the market as it affected his REIT investment. Claimant advised that about the same time of the complaint, the Customer had recently been diagnosed with cancer and was clearly shaken by the diagnosis. 
  • The complaint is erroneous because the Customer acknowledged his understanding of the illiquid nature of the investment when he signed the Commonwealth Alternative Investment Processing Form on November 2, 2004. 
  • It is the Arbitrator's opinion that the claim was clearly erroneous. Out of an abundance of caution, a regulator insisted that the Customer's comments about the illiquid nature of his REIT investment be treated as a complaint against the broker. This was erroneous as no complaint, as that word is commonly understood, was made and there was nothing presented at the hearing or in the written request for expungement suggesting otherwise. Respondent's decision to not participate in this matter suggests a tacit approval of this opinion. 
Bill Singer's Comment

Today's FINRA Arbitration Decision is the living embodiment of the expression "short and sweet." The sole FINRA Arbitrator masterfully breaks down a somewhat tortured fact pattern, cuts swiftly to the heart of the matter, and renders a decision based upon a compelling rationale. Bravo!

In today's expungement case, we should carefully note that the so-called customer complaint at issue was a statement in an email to the extent that the customer wanted to quickly exit what he purportedly characterized as an illiquid REIT. When confronted with the email, Kennell's compliance department opined that the email did not constitute a complaint and pursued no action. Thereafter, some regulator disagreed with the compliance department's analysis of the email and the communication was deemed a "customer complaint," which resulted in the tagging of Kennell's CRD with the disclosure. On the one hand. On the other hand. And now, on the third hand, the FINRA arbitrator found the regulator's opinion was "clearly erroneous." 


The key issue in this expungement case involves distinguishing between a non-disclosable customer communication and a disclosable customer complaint. All of which presents some interesting issues for in-house compliance staff. Does it -- or should it -- matter how a customer wants to characterize a given communication? By way of illustration, just because I call a banana an orange doesn't make it so -- and you're sure as hell not going to get orange juice out of a banana. 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

As with far too many rules that bedevil virtually every regulated industry, we find that the definition of what constitutes a reportable "complaint" requires us to first figure out just what constitutes a "grievance," which is not defined in the FINRA Rulebook. For example, as set forth in FINRA's online "Rule 4350 Frequently Asked Questions":

2.11 A few days ago, a member firm received a written customer complaint alleging that the firm engaged in securities fraud. Later that same day, the customer withdrew the complaint. Does the firm have an obligation to report the complaint for purposes of FINRA Rule 4530(d)?

Yes. A written customer complaint subject to FINRA Rules 4530(a)(1)(B) or 4530(d) must be reported within the prescribed timeframe, regardless of whether the customer subsequently withdraws it.

You may think that the above FINRA FAQ is dispositive of the issue in today's featured AWC. It is not. The above Q&A starts with the premise that the firm "received a written customer complaint" and that the customer subsequently requested its withdrawal. In Kennell's situation the "prior email" contained a comment from a customer about the illiquidity of a REIT investment -- that is not a clear-cut "complaint." Kennell's compliance department did not find the comment rose to a complaint but a regulator did.  

FINRA Minefield

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."  

For FINRA's legion of apologists and self-serving lackeys, go ahead, criticize my analysis all you want. Just keep in mind that an independent FINRA Arbitrator found that the email at issue in Kennell's case was not a "complaint" -- and that arbitrator deemed a regulator's determination to the contrary to be clearly erroneous. Who in that mix of facts was reasonable? Who exercised common sense? How could so many folks reference the same FINRA rules yet come away with such different conclusions? 

Also READ:

  • 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