Widow Lacks Standing In FINRA Arbitration Involving Husband's IRA

It's another day in the Compliance Department on Wall Street and the mail has just arrived. We got a few letters that are clearly coming from unhappy campers. Time to get out the old rubber stamp and mark them "RCVD" and enter the data into the online "Customer Complaint" file. Next, we notify the registered rep involved. Next, we arrange to amend the rep's Form U4 and to notify FINRA of the regulatory disclosable event. Ho hum . . . stamp . . . type . . . send. That's the compliance assembly line. The problem is whether all that stamping and processing is going on a tad too quickly and without someone asking whether the correspondence contains a "grievance" from a "customer." Why do those questions matter? Consider today's featured FINRA arbitration.

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in October 2016, Claimant Lee asserted negligence and responsibility under the doctrine of respondeat superior. As set forth in the FINRA Arbitration Decision:

The causes of action relate to Respondents' alleged failure to designate Claimant as the beneficiary to an IRA account belonging to her late-husband.

Claimant sought the alleged amount of the IRA at issue, which was alleged to be $135,373.76, plus attorneys' fee and costs. In the Matter of the FINRA Arbitration Between Mary C. Lee, Claimant, vs. AXA Advisors, LLC, Larry Dan George, and William Paul Evans, Respondents (FINRA Arbitration 16-03173, December 5, 2017).

Respondents generally denied the allegations and asserted various affirmative defenses, and sought the expungement of this matter from all Central Registration Depository records ("CRD").

Challenging FINRA Jurisdiction

On May 31, 2017, Respondents moved the FINRA Arbitration Panel to find that Claimant Lee's claims are not subject to FINRA arbitration because the organization lacks jurisdiction under FINRA Rule 12200. In their motion, Respondents George and Evans argued that Lee is not a customer of either of them.

FINRA Code of Arbitration Procedure for Customer Disputes Rule 12200: Arbitration Under an Arbitration Agreement or the Rules of FINRA

Parties must arbitrate a dispute under the Code if:

• Arbitration under the Code is either:

(1) Required by a written agreement, or

(2) Requested by the customer;

• The dispute is between a customer and a member or associated person of a member; and
• The dispute arises in connection with the business activities of the member or the associated person, except disputes involving the insurance business activities of a member that is also an insurance company.

Not Standing Up

Following briefing by the parties, on November 10, 2017, the arbitrators heard oral argument and granted Respondents' motions pursuant to this rationale:

Claimant brought this action on her own behalf. Claimant was not a customer of Respondents, nor did she purchase any goods or services from Respondents. Claimant represented that she is not the Executor or Administrator of her husband's estate. Claimant has no standing to bring this claim in FINRA arbitration, either on her own behalf or on behalf of her deceased husband.

Good for the Goose But Not So Good For The Gander

In an interesting twist, the Panel declined to hear the requests for CRD expungement because the arbitrators deemed that their lack of jurisdiction over the underlying arbitration claim precluded them from finding jurisdiction to entertain the expungement request.

Bill Singer's Comment

Compliments to this FINRA Arbitration Panel for an excellent job of tackling the "definition of customer" issue and the ramifications of that predicate consideration of that attachment of jurisdiction.

For a superb analysis of some of the issues raised in Lee v. AXA, read:

"Who Is A Customer For Purposes Of FINRA Arbitration Rule 12200" (BrokeAndBroker.com Blog, Guest Blog by Martin P. Unger, Partner, Wexler Burkhart Hirschberg & Unger, LLP / September 16, 2016)

Regulatory Reporting of Customer Complaints

(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.

(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.

• IRA
• Widow
• Spouses
• Husband
• Arbitration
• FINRA
• Standing
• Customer
• Complaint
• Oral Complaint
• Written Complaint
• Grievance
• Standing
• Rule 12200
• Rule 4513
• Rule 4530
• U4
• Expungement
• BrokeAndBroker
• Bill Singer