Dispute resolution

Complaints

Customers are sometimes dissatisfied with the status of their accounts or the service they’re provided. An upset customer can call and voice their displeasure (even yell or scream sometimes), but surprisingly enough, securities regulators do not consider this type of feedback a ‘complaint.’ FINRA Rule 4513 defines a complaint as:

“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”

Additionally, FINRA only considers expressed customer dissatisfaction as a complaint if it is in writing, which includes emails, text messages, and direct messages). When a complaint is received, member firms and their representatives must follow specific protocols (discussed below). Because of this rule, many brokerage firms limit their representatives’ communication methods with their customers. If your firm does not allow you to give customers your personal email address, this is probably why!

When a representative receives a complaint, they must forward it to their assigned principal (supervisor). Next, the principal works with the registered representative to resolve the issue on behalf of the customer. Member firms must keep a separate file of all customer complaints for at least four years. The file must contain records related to resolving the complaint, including any action taken or additional correspondence with the customer.

If this rule were to apply to verbal complaints, firms would have a tough time doing business. Registered representatives would be required to note anything negative said by the customer and submit it to their supervisor for review. If you’ve ever worked a service job, you know how often some customers complain (warranted or not). When a customer puts something in writing, it’s usually a serious problem that needs to be addressed.

The modern digital world complicates complaint protocols, especially with social media. If a customer complains by tweet or posts a complaint on Instagram, does it count as a complaint? Generally speaking, FINRA applies its normal rules similarly with social media. A tweet may seem harmless, but it’s technically in writing, requiring the firm to follow the protocols discussed above.

Lawsuits, mediation, & arbitration

In a perfect world, all valid complaints would be handled responsibly and ethically, potentially leading to fee reimbursements or restitution if any wrongdoing legitimately occurred. Unfortunately, that doesn’t always happen. If the firm’s handling of a complaint does not satisfy the customer, three options remain:

• A lawsuit
• Mediation
• Arbitration

A lawsuit may only occur if the customer did not sign an arbitration agreement. This is exceedingly rare; virtually all financial firms require an arbitration agreement to be signed to open an account. Customers are not legally required to sign them, but firms can make arbitration agreements a conditional requirement to open accounts. If an arbitration agreement has been signed, filing a lawsuit in the U.S. court system is prohibited.

Assuming an arbitration agreement has been signed, mediation may resolve the conflict if the two sides (customer and firm) are cordial and willing to negotiate. Mediation is a voluntary process that’s typically more cost-efficient and informal than arbitration (discussed below). Both sides agree to appoint a mediator, who then works to help the two sides negotiate an agreement to resolve the dispute. In the best-case scenario, both sides come to an agreement, which may involve monetary compensation. Any agreement made is private, requiring no public disclosure. However, either side may withdraw from mediation at any point, and no agreement is legally binding. This process essentially is a glorified negotiation with a third party (the mediator) facilitating the process.

If no agreement can be made in mediation, arbitration is the only remaining option to resolve a dispute. Arbitration is a formal process similar to a lawsuit. Instead of a judge, FINRA-provided arbitrators listen to the arguments and facts presented by both sides. Neither party can withdraw from this process once started, and any decision made by the arbitrator(s) is legally binding and cannot be appealed. Additionally, the results are made public on FINRA’s website, although the hearing itself is private.

While we’ve discussed arbitration regarding disputes between firms and customers, the same process can involve disputes between two or more firms or firms and their employees. The Code of Arbitration applies to intra-industry disputes, which prevents firms and registered representatives from filing lawsuits against each other. Except for complaints relating to sexual harassment and discrimination*, all disputes within the securities industry are handled through FINRA’s binding arbitration system.

*Representatives may file lawsuits related to sexual harassment and discrimination.