Was That Customer Email a Discussion, Grievance, or Complaint?
November 2, 2017
Respondent Kobrick appeared pro se, did not object to the expungement requests, and did not appear at the hearing.
Sophisticated Investor
The FINRA Arbitration Panel recommended the expungement from CRD of references to purported customer complaints filed by Respondent Kobrick based upon a finding that neither individual was involved in any investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds. In offering their rationale, FINRA arbitrators explained that:
The Claimants testified that the Respondent was sophisticated investor who had been the head of research at State Street Research, and whose assets exceeded $20 million. The Panel found that Claimant James Fagan introduced the Respondent to the Alliance Bernstein Global High Income Fund "ABGHI" as an investment that was a small portion of the Respondent's portfolio, well within his risk tolerance and that he was advised as to the risks of that investment. In an email dated January 2016, Mr. Kobrick alleged that Mr. Boshart and Mr. Fagan recommended a closed end mutual fund that was not suitable and failed to disclose the effect that a rise in interest rates would have on the fund's performance. Mr. Boshart, Mr. Fagan and J.P. Morgan denied that the ABGHI investment was unsuitable, but rather was well within the Respondent's risk tolerance and stated objectives. Mr. Fagan testified that the ABGHI investment was suitable, that Mr. Kobrick was familiar with bond funds, and had had a negative experience with bonds issued by the Commonwealth of Puerto Rico, that he believed Mr. Kobrick was informed of those risks, and the Respondent understood the risks involved with rising rates based on his market and investing experience and his overall net worth that exceeded $20 million. By emails dated February 17, 2016 and December 15, 2016, Mr. Kobrick stated that Mr. Boshart was not involved in the transaction, and that his prior emails were not intended to constitute a complaint against either of them, but were "spirited discussion(s)" about investments. To the extent they were treated by J.P. Morgan as a complaint, he asked that they be withdrawn. Mr. Fagan testified and the Panel concluded that the "claim, allegation or information" conveyed by Mr. Kobrick, as stated in his correspondence, was not intended to be a complaint. Based upon the testimony and the documentary evidence submitted, the Panel concluded that, to the extent the CRD reflects that a "claim, allegation or information" was made, that statement is clearly erroneous. In addition, the Panel concluded that, to the extent there was a claim, allegation or information as to Mr. Fagan's misconduct, it was false.
Bill Singer's Comment
Spirited Discussions
[M]r. Boshart was not involved in the transaction, and that his prior emails were not intended to constitute a complaint against either of them, but were "spirited discussion(s)" about investments. To the extent they were treated by J.P. Morgan as a complaint, he asked that they be withdrawn. . .
Grievance
All of which presents some interesting issues for in-house compliance staff. Does it -- or should it -- matter how a customer wants to characterize a given communication? By way of illustration, just because I call a banana an orange doesn't make it so -- and you're sure as hell not going to get orange juice out of a banana. As such, let's take a look at some pertinent FINRA rules addressing the nature of customer complaints:
FINRA Rule 4513: Records of Written Customer Complaints
(a) Each member shall keep and preserve in each office of supervisory jurisdiction either a separate file of all written customer complaints that relate to that office (including complaints that relate to activities supervised from that office) and action taken by the member, if any, or a separate record of such complaints and a clear reference to the files in that office containing the correspondence connected with such complaints. Rather than keep and preserve the customer complaint records required under this Rule at the office of supervisory jurisdiction, the member may choose to make them promptly available at that office, upon request of FINRA. Customer complaint records shall be preserved for a period of at least four years.
(b) For purposes of this Rule, "customer complaint" means any grievance by a customer or any person authorized to act on behalf of the customer involving the activities of the member or a person associated with the member in connection with the solicitation or execution of any transaction or the disposition of securities or funds of that customer.
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 . . .. . .(d) Each member shall report to FINRA statistical and summary information regarding written customer complaints in such detail as FINRA shall specify by the 15th day of the month following the calendar quarter in which customer complaints are received by the member.(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
As with far too many rules that bedevil virtually every regulated industry, we find that the definition of what constitutes a reportable "complaint" requires us to first figure out just what constitutes a "grievance," which is not defined in the FINRA Rulebook. Accordingly, what happens if a:
- FINRA member firm decides in good faith that a given customer communication is an expression of a "grievance;" and,
- reports the communication as a "Complaint;" but
- thereafter, the customer requests that the so-called Complaint be considered merely a non-grievance-expressing communication, or, in the alternative;
- the customer says that if a FINRA member firm won't comply with the requested reclassification that the Complaint be deemed withdrawn?
2.11 A few days ago, a member firm received a written customer complaint alleging that the firm engaged in securities fraud. Later that same day, the customer withdrew the complaint. Does the firm have an obligation to report the complaint for purposes of FINRA Rule 4530(d)?
Yes. A written customer complaint subject to FINRA Rules 4530(a)(1)(B) or 4530(d) must be reported within the prescribed timeframe, regardless of whether the customer subsequently withdraws it.
You may think that the above FINRA FAQ is dispositive of the issue in today's featured AWC. It is not. The above Q&A starts with the premise that the firm "received a written customer complaint" and that the customer subsequently requested its withdrawal. Consequently, in FINRA's above example, there is no debate about the threshold issue of whether the written customer communication was a "complaint." In the case of Respondent Kobrick's "prior emails," the customer is insisting that he did not intend them to constitute complaints but, rather, what he calls a "spirited discussion;" and, further, if J.P. Morgan has characterized Kobrick's emails as a "complaint," the customer is insisting that since such was never his intent that the brokerage firm deem the mischaracterized complaints as having been withdrawn.
FINRA Minefield
FINRA member firm compliance departments uniformly characterize 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.
(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?
- FINRA Rule 4530(a)(1)(B) requires prompt reporting when an associated person is "the subject of any written customer complaint involving allegations of theft or misappropriation of funds or securities or of forgery."
- Form U4, Item 14I (2) requires reporting of both written and oral investment-related, consumer-initiated complaints alleging a sales practice violation that settled for $15,000 or more.
- "Brokerage Customer Says That What Looks Like A Complaint Wasn't So Intended" (BrokeAndBroker.com Blog, October 19, 2017
- "That Customer Complaint May Not Be A FINRA Reportable Event" (BrokeAndBroker.com Blog, December 4, 2015)
- "FINRA Complains About CCO Complaint Reporting" (BrokeAndBroker.com Blog,October 29, 2015)
Download a PDF copy of Bill Singer Esq.'s analysis of FINRA's Expungement Rules