Customer Complaints and Away Settlements -- Matters of Interpretation?

For falsifying customer account documents, in violation of NASD Rule 2110 and FINRA Rule 2010, and causing his firm to have inaccurate records, in violation of NASD Rules 3110 and 2110 and FINRA Rule 2010, Respondent is suspended for four months and fined $25,000. For settling a customer claim away from his former firm, in violation of NASD Rule 2110 and FINRA Rule 2010, Respondent is fined $5,000. In addition, Respondent is ordered to pay the costs of this proceeding. The unauthorized transaction charge, alleging a violation of NASD Rule 2110 and FINRA Rule 2010, is dismissed. 

E. Facts Relating to the Settling Away Allegation 

The facts pertaining to this allegation are undisputed. In April 2009, customers ET and GT asked Respondent to deposit $10,000 from a maturing CD into GT's fixed universal life policy. The $10,000 deposit resulted in a $500 premium load to the customers. The customers complained and requested reimbursement of the $500 fee plus interest. 

On September 21, 2009, after Respondent had resigned from the Firm, he deposited $515.76, his commission plus interest, into the customers' checking account without the Firm's knowledge. Respondent testified that he did so because he did not realize that the $10,000 deposit into the insurance policy would result in a fee to ET and GT or a commission to him. Tr. 337. Because he did not disclose the charge to his customers, he believed that paying the commission back to the customers was the right thing to do. Tr. 490, 377. Because he was no longer at the Firm, he did not consider that he was settling away. Tr. 377

B. Settling Away 

It is a violation of NASD Rule 2110 and FINRA Rule 2010 for a registered representative to settle a customer complaint without his firm's knowledge or approval. Here, Respondent refunded a fee to a customer without any notice to, or acquiescence by, his Firm that he was doing so. Although Respondent was no longer with the Firm at the time that he paid the customer, this does not excuse his obligation to inform the Firm of his payment. 

Respondent's failure to notify the Firm of the settlement was unethical, and violated NASD Rule 2110 and FINRA Rule 2010 because the information was important to the Firm and investors. The Firm had a continuing obligation to update Respondent's Form U5 to reflect the settlement of a customer complaint, but Respondent's actions thwarted the Firm's ability to comply with its obligation. The information could also be important to the investing public and to future employers. Accordingly, the Hearing Panel finds that Respondent violated NASD Rule 2110 and FINRA Rule 2010.

B. Settling Away 

For settling customer complaints away from the firm, the Guidelines recommend a fine of $2,500 to $50,000, and consideration of a suspension for up to two years, or a bar for egregious cases. Guidelines at 34. 

Here, the Hearing Panel considered that Respondent was no longer with the Firm at the time he made the payment to the customer, and he was motivated by a desire to compensate the customer. Moreover, the Firm was aware of the customer complaint. The Hearing Panel concluded that a $5,000 fine was appropriate for this violation.

Settling Customer Complaints Away From the Firm

FINRA Rule 2010

Principal Considerations in Determining Sanctions

See Principal Considerations in Introductory Section

1. Whether the respondent provided the employer with verbal notice of settlement and the employer acquiesced, or whether the respondent deceived his employer.

2. Whether the actions delayed or obviated the filing of required Forms U-4 or U-5 or FINRA Rule 4530 filings.

Monetary Sanction

Fine of $2,500 to $77,000.

Suspension, Bar or Other Sanctions

Consider suspending the respondent in any or all capacities for up to two years. In egregious cases, consider barring respondent.

1. In early April 2012, the customers instructed Burris to liquidate one of their securities holdings to fund a tax payment to the IRS.

2. Specifically, they requested that Burris sell sufficient shares of a Franklin Templeton mutual fund (FAZIX) to generate proceeds of approximately $26,500. 

3. Burris failed to execute the trade. 

4. As a result, the customers' tax payment of almost $24,000 was rejected. 

5. On April 17, 2012, JPMorgan Chase Bank sent a letter to the customers informing them that their tax payment had been rejected because of "insufficient funds in [their] account." 

6. On April 19, 2012, the IRS sent the customers a letter informing them that their electronic payment had been rejected and that they could be subject to ??interest and penalty charges" for failure to pay their taxes on time. 

7. On April 23, 2012, the customers went to Burris's office at the firm's Sun City West branch and informed him that their tax payment bad been rejected for insufficient funds. 

8. During Burris's conversation with the customers on April 23, 2012, Burris acknowledged his error in not executing the trade they had ordered, and told the customers that he would 'take care of' their issue. 

9. Burris requested of personnel of JPMorgan Chase Bank that the customers' nonsufficient funds fee imposed by said bank be removed from the customers' bank account. Bank personnel thereafter removed said fee. 

10. With authority from the customers, Burris executed a new trade, selling approximately 2,356 shares of FAZ1X, resulting in proceeds of $26,772, which was sufficient to pay the customers' tax liability. 

11. At the customers' request, Burris then assisted the customers in transferring $26,500 into their account at JPMorgan Chase Bank, obtaining a cashier's check, and sending the check to the IRS "via overnight mail."

12. On April 27, 2012, Burris wrote a letter to the customers stating, ''I want to apologize for the error that has caused your tax payment to be rejected. That has since been remedied with the copy of the enclosed cashier's check dated April 27th, 2012. . . . You can be assured, if there are any tax penalties and/or interest, please bring them to my attention. I will have those remedied." 

13. On May 4, 2012, Burris sent a letter to the IRS, on what appeared to be official CISC letterhead, claiming that the insufficient funds issue was a result of "an error on the part of the bank" and requested that the IRS forgive the fees and interest as "a professional courtesy." 

14. Burris did not, at any time, inform anyone at CISC of his failure to execute the customers' trade, or his independent efforts to resolve their complaint, including his oral conversations with the customers regarding their complaint, his April 17, 2012 letter to the customers, or his May 4, 2012 letter to the IRS. 

15. Burris also did not obtain supervisory review or approval for either of the two outgoing letters described above nor did he keep copies of the letters in firm outgoing correspondence files or in the customers' file. 

16. Burris's supervisor learned of the customers' complaint when they came to the Sun City West branch office on September 14, 2012 to advise Burris of the final amount the tax penalties and interest charges assessed by the IRS, which was about $50 less than it originally invoiced. 

17. Because Burris was on vacation, the customers spoke with an assistant in the office who escalated their complaint to Burris's manager. 

18. The firm compensated the customers $623.56 for their tax penalties and interest. 

Settling a Customer Complaint Away from the Firm (FINRA Rule 2010)

23. A registered representative violates Rule 2010 by settling or attempting to settle a customer complaint without notifying the representative's member firm. 

24. The customers' notification to Burris that their tax payment failed because of Burris's failure to execute their ordered trade was a customer complaint, and therefore, Burris's actions described above were an effort by him to resolve the customers' complaint himself, without informing his supervisor at the firm. 

25. As alleged above, Burris: 

a. verbally informed the customers on April 23,2012 that he would 'take care of' their issue; 

b. executed a new trade; 

c. had a cashier' s check drafted and sent that check to the IRS to satisfy the customers' remaining tax liability; 

d. sent the customers a letter on April 27, 2012 apologizing for his error and assuring them he would remedy any fees or penalties that may have resulted from his error; and

e. sent the IRS a letter on May 4, 2012 requesting that the IRS forgive the customers' fees and penalties.

26. By not informing his firm of the existence of the customers' complaint and of his efforts to settle the customers' complaint, Burris violated Rule 2010

On March 16, 2021, Claimant advised of his attempts in February 2021 to serve the Statement of Claim and notice of the date and time of the expungement hearing upon the customer in Occurrence Number 248970 ("Customer"). Since Respondent was unable to provide Claimant with the Customer's address, Claimant's counsel sent notice to all 18 of the potential addresses he was able to identify for the Customer. Three of the deliveries were confirmed to be delivered by the USPS electronic tracking system. 

The Arbitrator conducted a recorded, telephonic hearing on April 5, 2021, so the parties could present oral argument and evidence on Claimant's request for expungement. 

Neither the Customer nor Respondent participated in the expungement hearing.

. . .

Claimant acknowledged paying settlement proceeds to the Customer out of his own pocket in order to preserve the client relationship, but no settlement documents were signed. Therefore, there was no settlement agreement for the Arbitrator to review.

The Customer, concerned about possible market loss, instructed Claimant to place a stop loss order on his account to be triggered at a certain dollar amount. Claimant did so. Due to market volatility/poor trading execution, the order was executed but the account declined in value. In order to preserve the account relationship and at the direction of his branch manager, Claimant contributed an amount equal to the decline in value into the Customer's account from Claimant's commissions. There was no settlement paperwork. Claimant also testified as to the adverse impact this disclosure has had on his business marketing efforts. 

If a customer "complains" that you did something that you were supposed to do, is that truly a "complaint?" 

If the firm and/or rep decide that for business reasons it's best to wipe out the diminution in value of $30,000 through crediting the account, is that a "settlement" of a "complaint," or is that merely a sound business decision to avoid the uncertainty of litigation?

• FINRA
• OHO
• Binstock
• Burris
• Nessim
• JPMorgan
• Josephthal
• complaint
• settlement
• settling away
• IRS
• BrokeAndBroker
• Bill Singer