Tuesday, January 20, 2015

Problems When Failing to Report Customer Complaints

FINRA rules require firms, and brokers, to report certain customer complaints on the broker's Form U-4 within 30 days of receipt of the complaint. FINRA's requirements for complaint reporting are extremely broad, and quite frankly, unfair. While FINRA's reporting requirements need to be changed, they also need to be followed.

The details of the requirement have changed over the years, but today, if a broker's customer files a sales practice complaint, in writing, or an arbitration or lawsuit, and alleges damages of  $5,000 or more or alleges forgery, theft, misappropriation or conversion of funds or securities, the complaint must be reported on Form U-4 for at least two years. The disclosure questions have become convoluted over the years as FINRA expands the universe of reportable complaints, but are detailed in Item 14 on Form U-4.

This is true even if the broker is not named on the complaint. Because customer attorneys decided it was clever not to name individual brokers in FINRA arbitrations, in the hopes of causing a rift between broker and firm, FINRA decided that if the firm can identify the broker (and it almost always can do so), the complaint or arbitration is reportable on the brokers U-4 - even though he was not sued.

Failing to file a required amendment can result in fines of up to $25,000 and a 30 day suspension - for the broker as well as the firm. It is FINRA"s position that each registered individual has the responsibility to keep his U-4 current and accurate, regardless of what his firm does or says. Brokers are still responsible for accurate filings, even if the firm gives them incorrect information regarding a disclosure.

Firms are also responsible, although sometimes the sanction is not as significant as it might be. Take the recent fine against Merrill Lynch. According to FINRA, Merrill took a year to report allegations that one of its financial advisers was siphoning money from client accounts. Finra fined Merrill $175,000 for this falure. The problem is that because the allegations went unreported, the broker was hired at another firm, and allegedly continued his thefts at the new firm.

If this failure to report had been at a small firm, the fine would have been more significant to the firm than this fine was to Merrill. And you can be sure that an individual, either the President, the CCO or the registration manager would have been named.

Not so when you are dealing with a large firm.

For more information, go to Finra Fines Merrill Lynch Over Delay in Reporting Allegations Against Adviser - NASDAQ.com

The attorneys at Sallah Astarita & Cox include seasoned securities regulatory attorneys, with decades of experience in SEC and FINRA regulatory and compliance regulations. For more information call 212-509-6544 or send an email.
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