Unsettled Settlement of Managed Account Goof Prompts FINRA Expungement

January 29, 2019

You know that thought-piece about whether a tree makes a sound when it falls in the woods but no hears it? For the Wall Street version of that puzzler, try this: What if a customer inquires about a goof in his account; and the brokerage firm apologizes promptly for its error and credits every penny that was inadvertently charged in the transactions at issue -- is that a settled customer complaint or simply "case closed?" Now, we have to wrestle with the nuance between a mere inquiry and a complaint. Next, we have to figure out whether a voluntary correction is a settlement. Further, we have to figure out if the benefit of hindsight allows a compliance officer to exercise common sense and amend what was reported to a regulator. No . . . I don't want to lessen any investor protections afforded by FINRA's robust expungement regime; however, fair-play for registered representatives should not be an alien concept within such a regime,

Case In Point

In a FINRA Arbitration Statement of Claim filed in July 2018, associated person Claimant Jackson sought $1 in compensatory damages and the expungement of a customer complaint from his Central Registration Depository records ("CRD"). In the Matter of the Arbitration Between Donald Ray Jackson, Claimant, v. UBS Financial Services Inc., Respondent (FINRA Arbitration Decision 18-02710 ' January 25, 2019) http://www.finra.org/sites/default/files/aao_documents/18-02710.pdf

Respondent UBS did not oppose Claimant's request for expungement, did not participate in the hearing, and agreed that a finding should be entered in favor of Claimant. 

Although the customer was notified of the expungement hearing, he did not participate in the hearing. 

Unsettling the Settlement

The FINRA Arbitration Decision notes that:

The Arbitrator reviewed the BrokerCheck Report for Claimant and noted that there was no written settlement agreement, although the occurrence was listed as "settled." Based on Claimant's testimony, the representations of Claimant's counsel, and Claimant's letter dated November 16, 2018, the Arbitrator found that the customer's account was restored at no cost to the customer within 24 hours after he made the complaint and that "settled" in this instance meant "case closed." 

Recommending Expungement

The sole FINRA Arbitrator denied Claimant Jackson's request for $1 in compensatory damages but recommended expungement based upon a FINRA Rule 2080 finding that the customers' claim, allegation, or information is factually impossible or clearly erroneous. The Arbitrator offered this excellent and persuasive rationale:

The customer has two accounts with Respondent, one managed account ("Managed Account") and one brokerage account ("Brokerage Account"). The customer called Claimant to buy two stocks that he specifically wanted. Claimant completed this transaction, purchasing the stocks, but inadvertently placed them in the customer's Managed Account, rather than his Brokerage Account. 

The Managed Account is automatically rebalanced on a regular basis. When the account was rebalanced, the two stocks were automatically sold. The customer caught this and called Claimant to tell him about it. Within 24 hours, the two stocks were repurchased and placed in the customer's Brokerage Account, all at no cost to the customer. The customer was satisfied with the correction and quick turnaround. 

With an abundance of caution, Respondent reported this incident as a customer complaint for the record, even though it was a call from a customer to his broker and rectified in 24 hours. The customer was properly notified of today's hearing, but did not join in on the telephonic hearing. Respondent's Statement of Answer to the claim, said: ". . . Respondent does not oppose the request for relief made by Petitioner (Donald Ray Jackson). The request should be granted . . ." This was an honest error and was quickly fixed by Claimant and Respondent, as soon as it was discovered. 

The event happened in 2005. When asked why Claimant waited so long to ask for expungement, Claimant stated that he did not realize he could have it expunged, until his boss recently told him he could. 

The complaint on Claimant's record serves no public purpose or useful benefit to customers and is misleading of the facts. Thus, it should be expunged from Claimant's CRD record

Bill Singer's Comment

Online FINRA BrokerCheck records as of January 29, 2019, disclose that Jackson was first registered in 1994 with UBS. The one and only disclosure on Jackson's BrokerCheck record under the heading "Customer Dispute - Settled" reflects a 2005 customer complaint seeking $27,594.08 in damages arising from an alleged sale of 1000 XEC and 600 ARLP on April 15, 2005. The complaint was reported "settled" on August 10, 2005, for $27,594.08, and UBS reported that Jackson contributed the entire sum. This appears to be the underlying matter that the FINRA Arbitrator recommended be expunged. As presently reflected on BrokerCheck, Jackson had consistently offered this "Broker Statement" by way of explanation:


And given those facts and Jackson's sterling quarter-of-a-century industry record, it took some 14 years and the filing of an idiotic arbitration against UBS in order for this stockbroker to clear his name of something that likely should never have been posted to begin with -- or, more to the point, should have been removed by a mere amendment. 


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

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."  

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 . . . and leaving it for years on Jackson's CRD unamended? Who exercised common sense? How could so many folks reference the same FINRA rules yet come away with such different conclusions? A matter was not technically settled but reported as such -- but, perhaps, after all, it was settled but maybe not? An administrative error occurred during the attempted rebalancing of a customer's account. It was not intentional. When it was reported to the broker-dealer by the customer, it was rectified at no cost to the customer. Was there an imitating customer complaint? Frankly, I would think so at first blush -- but then, I have to parse through the rules and the "complaint" ultimately devolves into an inquiry as to why something happened, and that "something" was a goof, which was corrected at no charge to the client. At times I do see a customer complaint; however, while the customer's complaint involves the firm's business, I'm not necessarily seeing any alleged "sales practice violation." 

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 Jackson 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.

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