Complaints, Arbitration and SIPC

Complaints

FINRA Rule 4513 requires each member to keep a separate file of all written customer complaints and any action taken, or a record of the file's location, at the office of supervisory jurisdiction. The file is kept for at least four years.

A complaint for these purposes is a written statement from a customer or someone acting on their behalf alleging a grievance involving the activities of the member or its associated persons. Email counts. A verbal complaint is not covered by the recording rule, but a firm's own procedures generally require it to be escalated, and a verbal complaint that recurs in writing has a history.

FINRA Rule 4530 requires a member to report to FINRA, within 30 calendar days, when the member or an associated person is the subject of specified events — including a written customer complaint alleging theft, misappropriation of funds or securities, or forgery; a finding of a violation by a regulator or SRO; certain criminal charges and convictions; and a civil or arbitration action alleging a violation that is settled or decided above a threshold. Members must also report statistical and summary information about written customer complaints quarterly.

The representative's obligations are simple and are worth stating flatly. Escalate every complaint to a supervisor immediately. Never respond to a complaint independently. Never settle one personally, and never guarantee a customer against loss to make a complaint go away — both violate Rule 2150. And never alter a record after the fact.

A customer complaint may also generate a disclosure event on the representative's Form U4, which appears on BrokerCheck.

Arbitration and mediation

Most customer disputes with a member firm are resolved through FINRA's arbitration forum rather than in court, because customer agreements typically contain a predispute arbitration clause.

Arbitration is binding and its awards are final, with only very narrow grounds for challenge in court — corruption, evident partiality, the arbitrators exceeding their powers. There is no appeal on the merits. Awards must be paid within 30 days, and failure to pay an arbitration award is itself grounds for suspension.

The Code of Arbitration Procedure for Customer Disputes, the 12000 series, governs disputes between a customer and a member or associated person. The Code of Arbitration Procedure for Industry Disputes, the 13000 series, governs disputes between industry parties — including a representative's dispute with their own firm, which must be arbitrated rather than litigated.

Panel composition depends on the amount in controversy. Claims below a threshold are decided by a single arbitrator; larger claims by a panel of three. In a customer case, the customer may elect an all-public panel rather than one including a non-public arbitrator, and small claims may be decided on the papers without a hearing under the simplified arbitration procedure.

The eligibility rule bars a claim from arbitration where six years have elapsed from the occurrence or event giving rise to it. Note carefully what that is not: it is not a statute of limitations, and a claim ineligible for arbitration may still be brought in court if the applicable limitation period has not run.

Mediation, under the 14000 series, is voluntary and non-binding. A neutral mediator helps the parties reach their own settlement; either side may withdraw at any time; and if mediation fails, arbitration remains available. Because it is faster and cheaper, a great many disputes are resolved there.

MSRB disputes involving municipal securities are arbitrated under FINRA's forum.

The disciplinary process

FINRA's 8000 series governs investigations and sanctions, and the 9000 series the Code of Procedure — the disciplinary process for rule violations, which is separate from the arbitration of customer claims.

An investigation begins with a request for information under Rule 8210, which obliges members and associated persons to provide documents, information and testimony. Failing to respond to an 8210 request is itself a violation, and it is one of the most common bases for a bar — because a person who does not answer cannot be examined.

A formal proceeding begins with a complaint issued by FINRA's Department of Enforcement, heard by a hearing panel, with appeal to the National Adjudicatory Council, then to the SEC, and then to a federal court of appeals.

Sanctions include censure, fines, suspension, bar, expulsion of a firm, and orders to pay restitution or disgorgement.

Minor rule violations may be resolved through a Minor Rule Violation Plan letter, which imposes a modest fine without a formal disciplinary record of the same weight. An acceptance, waiver and consent — an AWC — is the settlement mechanism: the respondent accepts findings and sanctions without a hearing and waives the right to appeal.

A statutory disqualification, arising from certain convictions, regulatory bars or findings, prevents association with a member unless FINRA and the SEC approve an application to continue.

SIPC

The Securities Investor Protection Corporation, created by the Securities Investor Protection Act of 1970, is the last resort when a member broker-dealer fails financially and customer property is missing.

SIPC coverage is up to $500,000 per customer, of which no more than $250,000 may be for cash claims. Coverage is measured per separate capacity: an individual account and a joint account are separate customers, and so are an individual account and an IRA; two individual accounts in the same name at the same firm are not.

Customers receive their securities back where they can be identified, with the remainder satisfied from the general estate and then, to the extent of the limits, by SIPC advances.

What SIPC does not cover is the important half. It does not cover market losses — a security that fell in value is not a SIPC claim. It does not cover commodity futures contracts, fixed annuities, currency, or investment contracts not registered under the Securities Act. It does not cover a bad recommendation, and it does not cover a firm's failure to execute an order.

FINRA Rule 2266 requires members to provide SIPC information — the SIPC website address and telephone number, and notice that a brochure is available — to customers in writing at least once each calendar year.

The distinction to keep clear, because customers ask: the FDIC insures bank deposits against the bank's failure; SIPC returns missing securities and cash when a broker-dealer fails; neither insures against an investment losing value, and no scheme does.