Q: I had a client recently who was upset that his account had declined. I took it as the client just blowing off steam since I know my client and he gets like that sometimes. I didn’t bother escalating it to management since I didn’t really see it as a client complaint. But he later gave my manager an earful and I caught flak for not reporting it. Where should we draw the line between a customer complaint and a client just venting?

A: The Supplementary Material to FINRA Rule 4530 says that a “member must report any written grievance by [a customer] involving the member or a person associated with the member. In addition, with respect to a [customer], … the member must report any securities-related written grievance by such person involving the member or a person associated with the member and any written complaint … alleging theft, misappropriation of funds or securities, or forgery.”

While this establishes three categories of complaints that must be reported, the common theme is that they be written. (Yes, an email would constitute writing.) However, note also the requirement that the complaint “involve” the rep or member firm. If someone is complaining only about declines in the markets, that’s unlikely to rise to the level of a reportable complaint. However, if the client sends an email complaining about your poor picks, that would be considered a complaint that involves you.

Another issue, however, is whether the complaint must be reported on your U4. Question 14I(3) of Form U4 asks whether, in the last two years, the rep has been the subject of an investment-related, consumer-initiated, written complaint which (a) alleged that you were involved in one or more sales practice violations and contained a claim for damages of $5,000 or more or (b) alleged that you were involved in forgery, theft, misappropriation or conversion of funds or securities.

The question is limited to those complaints involving sales practice violations that are defined specifically as conduct involving a customer that would constitute a violation of: any rules for which a person could be disciplined by any regulatory agency; or any state statute prohibiting fraudulent conduct in connection with the offer, sale or purchase of a security or in connection with the rendering of investment advice.

If the client is just complaining about performance, it’s unlikely that it would need to go on your U4 since poor performance is generally not considered a sales practice violation. Nevertheless, the firm would have to report the complaint under Rule 4530. Bottom line: When in doubt, let your manager know.

Q: During last year’s election, one of the reps at my firm would hold campaign events in our office for a particular local candidate. Phone calls about the events came in through our main branch telephone and the rep directed staff to answer these calls. The compliance department found out and the rep was terminated. Can you clarify the rules addressing political activity in the office?

A: MSRB Rule G-37(i) prohibits any broker-dealer or municipal securities dealer from engaging in any municipal securities business with an issuer within two years after certain contributions are made to any official of that issuer.

So, for example, contributing to a mayoral election campaign would mean a firm could not engage in any business involving that city’s municipal bonds. Additionally, in 2010, the SEC adopted Rule 206(4)-5 under the Investment Advisers Act of 1940, which does much the same as Rule G-37(i) except that it applies to the investment advisory activities of investment advisers and broker-dealers. It prohibits, in part, an investment advisory firm and its associates from providing, directly or indirectly, payment to any person to solicit a government entity for investment advisory services on behalf of the investment adviser.

More recently, FINRA adopted Rule 2030 to prohibit member firms from engaging in similar distribution or solicitation activities of government entities if certain political contributions have been made. Note that the FINRA Rule prohibits member firms from doing anything indirectly that they can’t do directly. That means member firms and their reps are prevented from funneling payments through third parties, including, for example, consultants, attorneys, family members, friends or companies affiliated with the member. There are exceptions for de minimis contributions, newly hired associates and returned contributions, but you should get more clarification from your compliance department before engaging in political activity.

Register or login for access to this item and much more

All Bank Investment Consultant content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access

Alan J. Foxman

Alan J. Foxman

Alan J. Foxman is a senior consultant and vice president at NCS Regulatory Compliance, and a partner at the law firm of Dew Foxman & Haugh in Delray Beach, Florida.