Avoiding the “Yes”

Below are some ideas for supervisors, compliance officers and rep's to consider when dealing with an irate customer. How you respond may determine whether the rep gets a "yes" on his U-4 and a black mark on the publicly available CRD database.

Also, here is a table to help you sort this all out. (The table and the discussion below apply to "sales practice violations" as defined in Form U-4, and not to allegations of forgery, theft, misappropriation or conversion).

The Beauty of Oral Complaints
What possible silver lining could there be to the gloom of an angry phone call from your customer complaining that you or your rep did something wrong? Here is one: by calling before writing, your customer may allow you or your rep to avoid a "yes" answer on the Form U-4.

Managers or compliance officers fielding an oral complaint from a customer often request that the customer put it in writing so the firm can better respond. There are many advantages to doing this. However, there is also a strong disadvantage: An oral customer complaint does not generate a "yes" answer on the rep's U-4; a written one usually does. Form U-4 does not require reporting of oral complaints. If the complaint is written and involves more than $5000, it must be reported.

Consider carefully, you sales managers and compliance officers, the advantages of working with your reps to resolve complaints without requiring the customer to put them in writing. Consider carefully, you reps, the advantages to you of reporting oral complaints to your supervisors quickly, to increase the chances of resolving them before your customer gets fed up and pulls out the pen and paper.

Settlements
If you settle a complaint for under $10,000 you do not need to mark "yes" on the Form U-4. So an oral complaint settled for under $10,000 will not dirty your Form U-4 in the least.

In contrast, a written complaint letter involving over $5,000, even if baseless or even if settled for under $10,000, leaves a black mark on your U-4 for two years.

Written Complaints vs. Lawsuits & Arbitrations
What if you have tried but simply cannot resolve the oral complaint with your customer? Your customer already has an attorney and you know that an arbitration is inevitable.

At this stage are you better off if the attorney writes a demand letter or if the attorney simply files the lawsuit or arbitration? Ironically, you are better off on your U-4 with the lawsuit or arbitration.

If the written complaint involves $5,000 or more, it will result in a "yes" answer that must remain for two years. Even if you settle the written complaint immediately for under $10,000 (which means you avoid a "yes" for the settlement itself) the "yes" for the existence of the written complaint stays on the rep's U-4 for two years.

In contrast, if a formal arbitration or lawsuit is filed, it must be reported as a "yes" but only while it remains pending. If it is settled for under $10,000, all "yes" answers can immediately be removed from the rep's U-4, without any two-year waiting period.

What if you receive a written complaint and are ready to settle it for under $10,000? Again, ironically, the rep would be better off if an arbitration or lawsuit were commenced before the settlement. This removes the 24-month "yes" under the written complaint rule and replaces it with a "yes" for the pending arbitration or lawsuit. The latter "yes" then will totally disappear on completion of the settlement, because the arbitration or lawsuit is no longer pending.

Also, in an arbitration or lawsuit, if the customer names only the brokerage firm as a party and not the rep, the rep will not have to mark a "yes" on his U-4, even if the dispute arises from his or her alleged actions. In contrast, any written complaint letter about alleged actions of the rep will require a "yes" on the rep's U-4.

Lawsuits & Arbitrations
If the rep is named as a defendant in a lawsuit or arbitration, you must report a "yes" while the action is pending. However, there is still hope of avoiding a permanent "yes."

If you win you can remove the "yes," but if the claimant is awarded even a penny, the "yes" becomes a permanent mark on your record.

As mentioned above, if you settle for under $10,000, you can immediately remove the "yes." So, if you settled for $9,999.99, there would be no yes.

Even if you think a lawsuit or arbitration will ultimately settle for over $10,000, there is a way to avoid a "yes." It may take some effort, but I have successfully done this. It requires some cooperation from the brokerage firm and some persuation of the plaintiff or claimant.

Almost always, the brokerage firm as well as the rep is named in a lawsuit or arbitration. If you can convince the plaintiff to settle separately with the rep for under $10,000 and dismiss him from the lawsuit or arbitration before reaching any understanding or settlement with the brokerage firm, then the rep avoids a permanent "yes" because he settled for under  $10,000. Be warned, however, that the settlement on behalf of the rep must truly be independent from any possible settlement in the future with the brokerage firm. In the case where I successfully did this, we convinced the plaintiffs that the reps really did not belong in the lawsuit, and the brokerage firm refused to even consider settling unless the reps were dropped. We made no promises about whether or not the firm would settle after the reps were dropped. The plaintiffs dropped the reps, the reps did not receive a permanent "yes," and the brokerage firm eventually did settle the case.

Expungements
There is one other way to avoid a "yes" on a settlement over $10,000: obtain a court order "expunging" the "yes" from the CRD system. In years past, the NASD would honor such a direction from the arbitrators. Then the state regulators objected. A compromise was reached; now the NASD will honor an expungement order only from a court. 

If you are not already before a court, you will have to stipulate, as part of your settlement, to an arbitration award directing the NASD not to record a "yes" answer. Then you will have to file a motion with the court to confirm the award, under the federal or state arbitration act. Obviously, you will have to be able to give the arbitrators and the judge good reasons to issue such an order. See NASD Conduct Rule 2130 for more details.

Ted Meikle has served as an attorney since 1980, including 4 ½ years as general counsel for a securities broker/dealer. He is now in private practice. This column is provided as general educational material and not as legal advice.

 © Ted S. Meikle