Complaints & mediation

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, with files created within the last two years being readily accessible*. These complaint files are maintained at the firm’s Office of Supervisory Jurisdiction (OSJ).

FINRA requires the following information be maintained on record for each complaint:

• Complainant’s name, address, and account number
• Date the complaint was received
• Name of representative identified in the complaint
• Description of the complaint
• The resolution of the complaint (if any)

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.

FINRA reporting requirements

FINRA Rule 4530 requires member firms to file complaint-specific reports. Complaints alleging theft, misappropriation of funds/securities, or forgery must be reported to FINRA within 30 calendar days of receipt. Additionally, firms must file summary and statistical reports related to all complaints received by the 15th calendar day after the end of the quarter in which the complaints were received. For example, a summary and statistical report for all complaints received in Q1 (January 1st - March 31st) must be filed with FINRA by April 15th.

These required filings can be made on the FINRA Gateway, the regulator’s primary “compliance portal”. A copy of any complaint involving theft, misappropriation of funds/securities, forgery, or other criminal actions must be filed. Otherwise, only a summary of statistical information is required (no need to file a copy of the complaint if it does not involve the situations listed above).

Dispute resolution

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 and a dispute remains, three options remain:

• A lawsuit
• Mediation
• Arbitration

*Although this chapter primarily covers aggrieved customers against firms, it goes both ways. A firm could pursue a lawsuit (if no arbitration agreement is signed), mediation, or arbitration against its customer(s) as well.

Lawsuits

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.

Mediation

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 involving a mediator (neutral third party) that’s typically more cost-efficient and informal than arbitration (discussed below). The mediator’s job is to help both sides communicate their positions and find a way to resolve the dispute amicably. An outside mediator can be appointed or chosen from FINRA’s roster of experienced mediators. If no mediator is selected, FINRA’s Director of Mediation will appoint one. Regardless of how the mediator is appointed, both sides must agree to the mediator selection.

FINRA’s Code of Arbitration Procedure, which provides protocols and procedures for both arbitration and mediation, allows either party to represent themselves or be represented by a third party (in mediation or arbitration). In many circumstances, an attorney is hired for representation. However, anyone can provide representation services if they are not suspended/barred from FINRA membership or are prohibited from providing representation services by state law.

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. We’ll discuss how the process and important rules related to arbitration in the next chapter.