FINRA Attorney Resources and Articles

A U4 Disclosure is Permanent – Proceed With Care.

When facing a customer complaint, treat the situation the same way you treated
the customer – with professionalism.

If you are a successful financial advisor, you are a compassionate person.  In a relationship based business, in which you can count many of your customers as friends, you care about how you manage their money.  So, when one of valued customers complains, you may be inclined to react emotionally.  Instead, apply the same degree of professionalism that you incorporated into the management of the customer’s portfolio.  Remember, the outcome of a customer complaint is almost always permanently disclosed on your public record.

When a customer complains, don’t let your initial reaction be driven by guilt.  In the 20 years in which I have represented financial advisors, many of them either made one or more of the following mistakes or was tempted to.

1.  Don’t admit responsibility. 

Compassion can drive an advisor to immediately reach out to a complaining client and admit fault.  While I understand the difference between moral and legal responsibility, it is my job to see that a fair process and assessment of the circumstances occurs before any legal responsibility is determined.  Extreme caution should be exercised in communicating with a client after a complaint has been received.  Report the complaint to your compliance department and follow their instructions to a tee.

  2. Don’t offer to make the client whole or share in the loss.

In addition to being absolutely forbidden by FINRA and most BDs, such an offer may be construed as an admission of responsibility and possibly as an attempt to cover up the incident.  Further, because the settlement of any grievance with a customer must be disclosed, there is no benefit in trying to make the issue go away quietly.

In my experience the negative consequences of an attempted cover up, even one born of the most altruistic motives, often overshadows the original complaint.

3.  Don’t immediately self report to FINRA.

I have talked more than one advisor off the ledge so to speak when their first reaction was self report to FINRA through their firm.  While it is always good practice to put your firm on notice, what you perceive is a reportable event may not be.  One cannot unrig the reporting to FINRA bell.  Care should be exercised in determining whether a “yes” answer is triggered to questions 14I (2) and (3) on your U4.  For example, not all customer complaints fall under the investment-related and sales practice violation categories of those questions.  With reported events permanently and publicly maintained on your record, fully analyze your reporting obligation before taking that step.

4.  Don’t get down on yourself.

I know this is easier said than done but don’t let a customer complaint damage your self confidence.  No matter now careful you are or how much you believe you know a client and understand their risk tolerance and investment objectives, they may complain. Especially in a down market or after the revelation that an investment product they own may have been a Ponzi scheme.  I will spare you the innumerable clichés which come to mind when one is faced with adversity.  Suffice it to say you should deal with the situation in the same manner as you would with other aspects of your life – thoughtfully and professionally.  Get help in dealing with this isolated event and continue to assist your clients.

In my practice I have noticed a recent uptick in terminations for cause as well as (particularly in the case of a registered representative attempting to change firms) the necessity to provide an explanation for any CRD blemish to new broker dealers,  clearing firms and insurance companies.

Terminations for cause from a broker dealer automatically trigger an inquiry from FINRA and often one or more states.  The RR’s response to this inquiry is very important in that the response has more than one purpose.  The first goal of any communication with FINRA is to illicit a ‘no-action letter’ (FINRA’s expression that no enforcement action will be pursued) Secondly, the substance of the response may be used to explain the termination to a new broker dealer, insurance company or clearing firm.  Given the multiple uses of the response it is critical that it be (1) well thought out; (2) succinct but informative; and (3) contain no admissions to the extent they can be avoided.  These guidelines should apply to any communication with FINRA given the stakes and the very real possibility that FINRA may elect to take formal action if they are not convinced that no action is appropriate.  The guidelines are also important in the ever changing regulatory environment in which states may take the lead in termination investigations and industry members are increasingly demanding explanations for any CRD entry.

While many RRs are good writers and communicators, they seem not to understand the above guidelines or that their initial explanation to FINRA may lock them into a position which hurts (sometimes permanently) their ability to move to another firm or get appointed in certain states or with certain insurance companies.

I recommend that RRs hire counsel at the first sign that they might be released from their broker-dealer under any circumstances other than a voluntary resignation.  I understand that such awareness is not realistic in those instances in which a RR has unwittingly violated a firm procedure or industry rule/law.  But, however slight the chance, the possibility that a firm may reconsider a termination for cause and charge the reason for separation to voluntary or permitted to resign could make a huge difference in a RR’s career.

Further, I recommend that upon termination for cause, the RR absolutely retain counsel to assist in the formulation and submission of the RR’s response to the FINRA inquiry.  This step is essential, with the understanding and mindfulness that the RR’s explanation will be scrutinized by FINRA, one or more states and industry members (including potential hiring firms) with the power to dramatically impact the RRs career.

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