Q: What is the proper way to define a client complaint? Someone being upset with paperwork not being mailed out on time or disappointing investment performance as opposed to an alleged breach of fiduciary duty are all very different levels of complaints. How is a complaint defined for compliance purposes?
A: The Supplementary Material to FINRA Rule 4530 gives some guidance when it says that a “member must report any written grievance by [a customer] involving the member or a person associated with the member. In addition, with respect to a [customer], … the member must report any securities-related written grievance by such person involving the member or a person associated with the member and any written complaint … alleging theft, misappropriation of funds or securities, or forgery.”
So clearly a letter or email alleging that someone stole money or securities or forged the client’s signature is a “complaint.” But short of those specific allegations, how do we determine if something rises to the level of a reportable complaint? At one end of the spectrum, if someone is merely voicing their displeasure about the performance of their account that, alone, is unlikely to rise to the level of a reportable level. However, if the client goes further than that and writes that your investment selection was terrible, then it seems to fit within that FINRA guidance. It’s a “written grievance” “involving a person associated with a member.”
This brings up the next question: Does that complaint have to be reported on the individual’s U4? Question 14I(3) of Form U4 asks whether, in the last two years, the rep “has been the subject of an investment-related, consumer-initiated, written complaint which…alleged that you were involved in one or more sales practice violations and contained a claim for damages of $5,000 or more.” If we assume that the client is complaining about your investment selection because he lost more than $5,000, does a poor stock pick constitute a “sales practice violation?”
The answer is: It depends. Sales practice violations are defined specifically as “conduct involving a customer that would constitute a violation of: any rules for which a person could be disciplined by any regulatory agency; or any state statute prohibiting fraudulent conduct in connection with the offer, sale or purchase of a security or in connection with the rendering of investment advice.”
Since you’re not expected to have a crystal ball, an allegation that you made picks would not, by itself, normally be considered a sales practice violation. However, if the client alleges that your picks went against their risk tolerance or suitability, we start getting into potential disciplinary territory. If you recommended investments that were inappropriate for a client you could potentially be disciplined for violating the suitability or “know your customer” rule. So a complaint with those sorts of allegations should probably be reported.
And yes, it’s not always fair that you’d have to report something that might seem so minor, but at the end of the day, not reporting something that you should have and getting hit with a disciplinary action (which would then have to be reported in addition to the original customer complaint) would be an even worse outcome.
