My independent firm told me that I am responsible for reporting “complaints” I get from my clients to the firm's compliance officer.
Not surprisingly, since Labor Day, I've had more clients complaining (sometimes with notes or in emails, about the markets, performance, stocks and funds) than in all of my prior seven years in the business put together.
I think the “complaints” are just whining, and will be forgotten when the markets recover. I want to know when I really must report to the home office. Because I understand it will dirty my license, I don't want to at all … and what happens if I don't anyway?
To report or not to report: That is the question. To put your mind at ease from the outset, please understand that not all customer complaints will “dirty” your license. Generally speaking, there are three layers of customer complaint reporting for registered representatives and their member firms: First is your firm's mandate to advise the home-office compliance officer of any complaints. Second, your firm has an obligation to report certain customer complaints to FINRA, pursuant to Rule 3070. Third, certain customer complaints will require an amendment to your Form U4.
Most (if not all) firms require written complaints to be forwarded to the home-office compliance department for review. The compliance department will review and evaluate the complaint, primarily to determine if there is any sales practice issue involved. Hopefully, your compliance department will work with you to determine when a complaint is really a complaint and not “just whining.” Verbal complaints are not reportable and, depending upon the firm, may not have to be forwarded to the compliance department.
Pursuant to Conduct Rule 3070, your firm is required to report it when one of 10 specific events occurs, and report it in a timely manner (See Rule 3070 for the list). It also has to file quarterly statistical information about written customer complaints. This information will not necessarily find its way to a Form U4 amendment. There is some leeway as to what must be reported on a Form U4. For example, complaining about market loss isn't reportable, unless it's connected to some other sales practice issue. Work with your compliance department; your firm is no more interested in seeing your U4 amended than you are.
A “ding” on your Form U4 is what will find its way to the Public Disclosure section of the FINRA website. Form U4 sets forth instances where customer complaints must be disclosed. Specifically, questions 14I(2) and 14I(3) are at issue. Allegations involving sales-practice violations, forgery, theft, misappropriation or conversion of funds or securities must be disclosed. A straightforward market loss complaint will not rise to that level.
Perhaps the biggest mistake you can make is to fail to report a written complaint. Once discovered, FINRA will almost certainly investigate the situation — and possibly bring an enforcement action against you. Potential sanctions for failing to amend a Form U4, or to amend a Form U4 in a timely fashion, include fines and suspensions. Fines may range from $2,500 to $50,000. Time out may range from five to 30 business days, or longer if the conduct is found to be repetitive or particularly egregious. Don't compound what may not be a problem in the first place by sticking your head in the sand and not reporting a written customer complaint to your compliance department.
Brian A. Carlis, Esquire
Stark & Stark, P.C.
Princeton, New Jersey
A: As sure as the leaves fall in the autumn every year, when the market begins its downward spiral customers who were previously happy are now upset with the services of their advisors. Unfortunately, there is no federal, state or SRO statute, rule or regulation that provides comfort and/or protection to registered reps in these situations. Instead, well-settled regulatory practice requires the reporting of such customer complaints.
In particular, FINRA Conduct Rule 3070 requires each member firm to promptly report the subject of any written customer complaint involving allegations of any theft, misappropriation of funds, securities or forgery; any settled claim for damages by customer, broker or dealer exceeding $15,000; or where there has been litigation. Such reporting must be done within 10 business days after the member firm knows, or should know, of the existence of the situation.
Similarly, registered reps must report complaints on their Form U4s, pursuant to Question 14L, and disclose any investment-related customer or consumer-initiated complaints involving one or more sales-practice violations where the customer claimed $5,000 or more in damages, or where the complaint was settled for $10,000 or more. In addition, reps must report any allegation involving forgery, and any misappropriation or conversion of funds or securities. These two reporting requirements place the onus upon the registered rep to report nearly every form of written (and sometimes oral) customer complaint that may exist. As such, member firms generally promulgate compliance manuals and policies requiring all registered reps to report any type of customer complaint to the compliance department. Thus the requirements of the questioner's firm seem to be standard in the industry.
Of course, many complaints arise after downturns in the securities markets, as the questioner correctly points out. Many complaints may, in fact, be “whining.” (Interestingly, when the markets recover, customers tend not to complain.) However, the registered reps must still report these notes and/or emails to the compliance officer of his or her firm.
If the reports are not made to the home-office compliance officer as the questioner's firm seems to require, the firm could ultimately terminate the registered rep, and report that he or she failed to follow firm procedures. This is far more likely to have the effect of “dirtying” the registered rep's license — a point that the questioner seems to want to avoid.
Additionally, the questioner seems to suggest that his employment at an independent b/d may necessitate different procedures. Unfortunately the rules at independent b/ds are the same. Independent b/ds are registered b/ds, just like large Wall Street concerns. Indeed many independent b/ds face greater scrutiny than other b/ds from regulators because of their business models (many brokers in many offices, usually working “independently”). That means many of these independent firms have even more stringent conduct codes.
Finally (and as an added incentive to report these written notes and/or emails), regulatory action may arise if the registered rep chooses not to make such a report. The FINRA Sanctions Guidelines require penalties for the failure to timely file FINRA Conduct Rule 3070 reports and/or amendments to the Form U4. Suspensions and fines of up to two years, or a bar, may be considered if these reports are not filed.
In the end, the rep is probably better off notifying compliance of all complaints. Otherwise, the risk of future regulatory scrutiny is too great.
New York City/Roseland, N.J.
Encounter a situation at work that makes you uncomfortable? Hesitant to change firms because you're unclear how your clients could be affected?
Don't fret. Send your questions to Registered Rep. Contributing Editor Ann Therese Palmer at [email protected]. Then look for an answer in a future Ethical Rep column. Anonymity guaranteed.
The Ethical Rep.
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