Death and taxes are an inevitable part of everyone's life. If you're a registered rep, you can add “customer complaints” to that short list.
It's an article of faith among reps that once a complaint is lodged against them, it's an automatic black mark, regardless of the rep's guilt or innocence. Indeed, more than one rep has noted the similarities between a securities complaint and a sexual harassment charge: In both types of cases the accused comes away sullied no matter what.
Still, that doesn't mean reps have no options when faced with a complaint. In fact, many can be handled in a way that minimizes the damage to a rep's reputation and to his permanent record.
Are All Complaints Reportable?
It's often assumed that once a customer complaint is filed, the broker must respond by reporting it — to his firm, to the self-regulatory organization and via the infamous “yes” box on the form U4. But this isn't always the case.
It's true that New York Stock Exchange Rule 351 requires the reporting of oral and written customer complaints. However, NASD Conduct Rule 3070 requires firms to promptly report only when an associated person is the subject of a written customer complaint involving allegations of theft, misappropriation of funds or securities or of forgery.
What this means in practice is this: For advisors subject to NASD oversight there's a great benefit to promptly responding to customer phone complaints. If an advisor can resolve the matter cordially over the telephone he can often head off the dreaded black marks.
All Complaints Are not Equal
In deciding how to report a complaint, it's important to distinguish between the verbal ranting of a client on the phone, the written threats of a lawyer's letter and the formal arbitration/lawsuit complaint.
Form U4 Items 14I(1) and (2) require separate reporting for arbitration (or civil litigation), which is (a) pending; (b) decided against the rep with an award for any amount; and (c) settled for at least $10,000. There's also a requirement to report any complaint (including an oral one) that settles for at least $10,000.
Item 14I(3) kicks in when a rep gets named in an investment-related, consumer-initiated written complaint that alleges the rep's involvement in forgery, theft, misappropriation or conversion of funds or securities. 14I(3) also applies if a client alleges sales practice violations of at least $5,000. (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.)
The complaints that result in arbitration are straightforward — they result in that permanent “yes” on the U4 (unless the settlement deal comes in under the threshold dollar amount.) But the nasty-gram — a letter from a disgruntled client who is mainly blowing off steam — is a different matter. If the client is simply venting and doesn't do anything more than send in that complaint, there's good news: After 24 months a rep can change the U4 “yes” to a “no,” and clear his record.
Good Faith Is Neither Good nor Faithful — Discuss
Note that Item 14I(3) says that in the absence of specified damages, a customer complaint is reportable unless the firm makes a good faith determination that the damages would be less than $5,000. This is an area in which in-house compliance and legal types often simply check “yes,” rather than go the extra mile to do the right thing for their registered reps.
Here's the ammunition a rep needs to fight the good fight: If you receive a written customer complaint, chances are your firm will review the letter and inform you that you are required to file a report and amend your Form U4 to answer “yes” to the event. However, if the customer complaint doesn't specify damages, do your homework. Telephone your firm's compliance/legal staff and ask for an opportunity to argue the case against disclosure. It's probably advisable to hire a lawyer at this stage, but if you can't afford one or choose not to, I've drawn up a sample letter for reps to send to their firms (see page 61).
Bill Singer is a partner with the law firm of Gusrae, Kaplan & Bruno. rrbdlaw.com
Sample Letter Arguing Against a U4 “Yes”
Dear Ms. Ida Noh
Director of Compliance
Byhai and Sellow Broker Dealers
By letter dated August 1, 2004, Ms. Ima Payne, my former customer, communicated with Byhai and Sellow BD, and, as a result, you have instructed me to amend my Form U4 to report a “yes” answer in response to question 14I(3)(a). For the following reasons, I do not believe that the allegations in Ms. Payne's letter require an affirmative disclosure.
A. Question 14I(A)(3)(a)
Question 14I(A)(3)(a) of the Form U4 reads as follows:
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(1) or (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.)
B. The Letter
Nowhere in Ms. Payne's letter is there a claim for specific compensatory damages. In fact, her letter mainly explains her understanding of a recent news story: “I am writing to you since reading a newspaper article has certainly enlightened me as to why most of the money I entrusted to your judgment wound up in annuities. From what the writer says, you were only looking to earn fees. I'm unhappy that you did this to me. We should have bought more stocks and maybe some bonds.”
Significantly, her letter does not make a request to sell the investments nor does it contain a claim for compensatory damages. Upon receipt of her letter I immediately telephoned her on August 2 and answered all her questions and concerns, and noted where I disagreed with the assertions in the newspaper piece.
C. The Second Letter
On August 9, 2004, less than two weeks after sending her first letter and following our discussion, Ms. Payne wrote to me and admitted that “I realize now that I should have contacted you before writing my previous letter so that we could have discussed the things that troubled me. I apologize.” You will note that the points she raised in this second letter dealt mainly with confusion as to the product and never once asked to rescind the trade or mentioned damages above $5,000.
D. Good Faith Determination
I have attached several worksheets to support my contention that a good faith determination by Byhai and Sellow will clearly show Ms. Payne has not sustained in excess of $5,000 in damages. Notably, her investments are presently valued in excess of her initial investment and there is no allegation that the value at maturity has been compromised. I am confident that if you independently undertake the same calculations, you will agree.
Based upon the two letters, it is clear that Ms. Payne requested and obtained clarity concerning her investments, and did not seek compensatory damages. Moreover, even if you characterize her communications as “complaints,” she has not alleged any specific damages and the facts show that no good faith calculation results in a finding of more than $5,000 in damages. As such, I respectfully submit that the letters do not require me to amend my spotless brokerage license.