Stockbroker Refunds Commissions To Unhappy Morgan Stanley Customer

SIDE BAR: Although the AWC states that "During all periods mentioned herein, Robinson was associated with Morgan Stanley . . .," the only dates mentioned are "[b]etween September 2014 and August 2015 . . ."  According to online FINRA BrokerCheck records as of September 11, 2017, Robinson was registered with FINRA member firm Morgan Stanley from December 2009 to October 2015.

Undisclosed Settlement

The AWC alleges that between September 2014 and August 2015, a customer identified only as "HL" had complained on three separate occasions to Robinson regarding the amount of commissions that Robinson charged. The AWC states that:

Rather than bring the customer's complaints to the attention of the Firm, Robinson settled the complaints by issuing three checks in the total amount of $12,203.23 to the customer's wife.

Sanctions

FINRA deemed that Robinson's settlement of the customer's complaints without his firm's knowledge or approval constituted violations of FINRA Rule 2010. In accordance with the terms of the AWC, FINRA imposed upon Robinson a $10,000 fine and a 15-business-day suspension from association with any FINRA member firm in any and all capacities.

Bill Singer's Comment

Reporting Requirements

According to online FINRA BrokerCheck records as of September 11, 2017, under the heading "Employment Separation After Allegations," on October 6, 2015, FINRA member firm Morgan Stanley "discharged" Robinson based upon:

Allegations involving unapproved fee reimbursements made to a client

This AWC raises an interesting issue as to whether or not Robinson had failed to disclose a settlement of a customer "complaint," as that latter term is technically defined in FINRA's Rulebook. For those among you who are unfamiliar with the concept of nuance, please understand that I am not questioning whether HL complained, which is clearly the case. What I am examining is whether the communication from HL to Robinson met the industry's definition of a "customer complaint." Pointedly, I am not suggesting that it is a desired industry practice to have registered reps enter into undisclosed settlements with customers. To better understand my point,, consider this FINRA Rule:

FINRA Rule 4530: Reporting Requirements

(a) Each member shall promptly report to FINRA, but in any event not later than 30 calendar days, after the member knows or should have known of the existence of any of the following:

(1) the member or an associated person of the member:

. . .

(B) is the subject of any written customer complaint involving allegations of theft or misappropriation of funds or securities or of forgery;

. . .

(G) is a defendant or respondent in any securities- or commodities-related civil litigation or arbitration, is a defendant or respondent in any financial-related insurance civil litigation or arbitration, or is the subject of any claim for damages by a customer, broker or dealer that relates to the provision of financial services or relates to a financial transaction, and such civil litigation, arbitration or claim for damages has been disposed of by judgment, award or settlement for an amount exceeding $15,000. However, when the member is the defendant or respondent or is the subject of any claim for damages by a customer, broker or dealer, then the reporting to FINRA shall be required only when such judgment, award or settlement is for an amount exceeding $25,000; or . . .

. . .

(e) Nothing contained in this Rule shall eliminate, reduce or otherwise abrogate the responsibilities of a member or person associated with a member to promptly disclose required information on the Forms BD, U4 or U5, as applicable, to make any other required filings or to respond to FINRA with respect to any customer complaint, examination or inquiry. In addition, members are required to comply with the reporting obligations under paragraphs (a), (b) and (d) of this Rule, regardless of whether the information is reported or disclosed pursuant to any other rule or requirement, including the requirements of the Form BD. However, a member need not report: (1) an event otherwise required to be reported under paragraph (a)(1) of this Rule if the member discloses the event on the Form U4, consistent with the requirements of that form, and indicates, in such manner and format that FINRA may require, that such disclosure satisfies the requirements of paragraph (a)(1) of this Rule, as applicable; or (2) an event otherwise required to be reported under paragraphs (a) or (b) of this Rule if the member discloses the event on the Form U5, consistent with the requirements of that form.

Communications Versus Complaints

According to FINRA Rule 4530, not every communication from a customer is a "complaint." Among the more common errors that I see many member firm compliance departments commit is to uniformly treat far too many "communications" from customers as involving a "complaint," when, in fact, the communication is merely an inquiry or comment. Further, not every customer complaint necessarily rises to the level of an event requiring disclosure; for example, a complaint that a stockbroker was rude on the telephone or that the firm's online platform is not user friendly would not (absent more) require a regulatory disclosure.

Is There A "Customer"?

Additionally, even if a communication involves what may be deemed a reportable complaint, another important determination is whether the communication emanated from a customer or was transmitted subject to the customer's authorization (through a lawyer or agent as two common examples). At times a customer's family member or friend may send to an employer firm a complaint against a stockbroker.  If the sender of that complaint is not a customer, then that communication may not require regulatory disclosure -- which is not to suggest that a firm's compliance department should not inquire as to the issues raised.

"Oral" Complaints

Many industry participants do not necessarily consider whether a customer communication voicing a complaint is in "oral" or "written" form. A peculiar quirk of FINRA's rules is that the self-regulator's reporting requirements require the prompt reporting of "any written complaint" and do not similarly address the mere "oral complaint. Additionally, FINRA's reporting requirement limits the reporting of "any written customer complaint" to those "involving allegations of theft or misappropriation of funds or securities or forgery."

Know Your U4

Always be mindful, however, of the difference between the obligations imposed upon a FINRA member firm to report events to the self-regulatory organization and the separate disclosure obligations of the Uniform Application for Securities Industry Registration or Transfer ("Form U4"). Notably, under the Form U4 heading "Customer Complaint/Arbitration/Civil Litigation Disclosure," we find the following Item 14I questions:

(2) Have you ever been the subject of an investment-related, consumer-initiated (written or oral) complaint, which alleged that you were involved in one or more sales practice violations, and which:

(a) was settled, prior to 05/18/2009, for an amount of $10,000 or more, or;

(b) was settled, on or after 05/18/2009, for an amount of $15,000 or more?

(3) Within the past twenty four (24) months, have you been the subject of an investment-related, consumer-initiated, written complaint, not otherwise reported under question 14I(2) above, which:

(a) alleged that you were involved in one or more sales practice violations and contained a claim for compensatory damages of $5,000 or more (if no damage amount is alleged, the complaint must be reported unless the firm has made a good faith determination that the damages from the alleged conduct would be less than $5,000), or;

(b) alleged that you were involved in forgery, theft, misappropriation or conversion of funds or securities?

Nuisance Value

The Robinson AWC raises a number of interesting questions not fully answered in the presentations of facts. For starters, even assuming that HL "complained" about excessive commissions, such a dispute does not necessarily involve allegations of forgery, theft, misappropriation, or conversion of funds/securities. Similarly, according to FINRA's online Form U4 Explanation of Terms:

Sales Practice Violations: Shall include any conduct directed at or involving a customer which would constitute a violation of: any rules for which a person could be disciplined by any self-regulatory organization; any provision of the Securities Exchange Act of 1934; 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.

• Undisclosed Settlement
• Settlement
• Commissions
• Morgan Stanley
• Form U4
• Sales Practices
• Sales Practice Violations
• AWC
• FINRA
• Rule 4530
• BrokeAndBroker
• Bill Singer