You've got a problem. An unhappy customer. And the unhappiness isn't the result of a suitability claim or churning complaint. The problem is that the market has tanked and the client's stocks are down, or the market is up and the stocks you (or your research department) recommended are plummeting.
Some customers sue. Arbitrations are easy to file and, while unpleasant, they can be dealt with by your firm's lawyers. Harder to deal with are those customers who simply threaten you, implying that they are going to take their grievance further if you two can't come to some sort of agreement. “Unless this matter is settled between us,” they suggest, “the dispute will wind up on your U-4.”
How should you respond? Your instincts tell you to placate the customer, but that's a mistake. In fact, settling with a client on your own violates securities laws. So, if your client hints at a private settlement, refer him to the appropriate person at the firm. Otherwise, keep your wits about you and:
- Don't act scared
Showing anxiety or lack of confidence can hurt you. Acting unprofessionally will only convince the customer that you have done something improper.
- Don't provide ammunition
Avoid engaging in a lengthy discussion about what went wrong. The Mr. Nice Guy broker agrees with statements designed by the customer to create liability. And, since it's permissible in many states to tape a phone call without the consent of both parties, the customer could be recording your conversation.
- Don't settle it on your own
Trying to settle the complaint without your firm's knowledge or consent can be disastrous. In fact, you could be violating securities regulations. And by offering to settle, you can add to your litigation woes. If the customer sues, he will make your offer seem like an admission of guilt.
- Don't smear your client
Hiring a private detective to get dirt on the customer is expensive and rarely works. Also, an arbitration panel will get angry if they find out you're probing into someone's private affairs. In any event, you don't want to pressure a client, no matter how weak his claim.
So, what can you do?
- Know your customer
Do not underestimate your customer. He likely understands the market and has been gathering ammunition. In a country where The Wall Street Journal has the largest circulation of any daily paper, he has access to lots of financial information.
- Remember, he made the decision to buy
You may have sold him on an investment, but he understood the risk — he's a grown-up.
- Face up to the problem
In life, some problems simply have to be addressed. You and your firm have the resources to deal with it.
- Be properly outraged
If the client even hints at a private settlement, tell him to deal with the firm. You have no power to settle a claim.
- Make sure your U-4 is correct
If the unhappy customer's attempt to muscle you fails, as it should, and he submits a complaint, make sure the report on your Form U-4 is at least accurate before it's filed. Every complaint has to be investigated, but not every sales practice complaint has to be reported. For example, allegations of churning aren't reportable if the client's account had too few trades to constitute churning under any definition. If the facts argue otherwise but your registration department insists on reporting, take the matter to management or the firm's general counsel or retain your own counsel to help.
Proskauer Rose LLP's broker-dealer practice group, including Kathy H. Rocklen, Richard Marmaro, John D. Singer and Lionel E. Pashkoff, helped write this article.
Saul Cohen is a partner in the broker-dealer practices arm of the law firm of Proskauer Rose LLP.