How and Why Customer Complaints Impact Forms U4 and U5

The securities and investment landscape is governed by highly specific rules and regulations for the protection of investors. This includes generally informing consumers of when a customer complaint is filed against a financial firm or its registered representatives or investment advisor representatives involving an investment-related matter.[1] This is accomplished in part by providing details of the complaint on documents such as Forms ADV and in the financial advisor’s Broker Check form. For financial advisors specifically, regulators such as the Financial Industry Regulatory Authority (FINRA), U.S. Securities and Exchange Commission (SEC) and states require financial advisors to timely report disciplinary reports on their Form U4 in response to Question 14.I. Within that category, there are a series of questions related to the status of the complaint, the amount of the settlement, whether it involved a sales practice violation, and if it involved arbitration or litigation. Dependent upon the response, such disclosures could materially impact whether the financial advisor is terminated from employment, is investigated by a regulator, disciplined by a regulatory body, or result in permanent revocation of a certification or license (such as for disciplined individuals reviewed by the CFP Board). Moreover, having a customer complaint disciplinary report could make it difficult for the financial advisor to gain employment (dependent upon the type of disclosure made). To best understand the impact that a customer complaint can have on a financial advisor’s Form U4/U5, it is important to understand the customer complaint process[MJ2],

Purpose of Form U4 and Form U5

Form U4 is filed when a financial advisor is hired by a broker-dealer or registered investment adviser. It is, essentially, a publicly available background check that includes information on employment history, education, professional licenses, and any regulatory, criminal, or civil disciplinary reports related to the financial advisor. The Form U5 is filed when a financial advisor terminates his or her association with a financial firm. The Form includes information such as the termination date, the reason for the termination, and the reason for the termination if the financial advisor was discharged or permitted to resign. Thus, the employer will be given the opportunity to disclose potential issues such as violations of firm policy and other regulatory concerns tied to the individual. The employer will also disclose whether an internal review was conducted based on facts and circumstances known at the time of or after termination of the financial advisor. Both Forms U4 and U5 have a significant impact on a financial advisor’s[MJ3] career and reputation as information on disciplinary issues, including customer complaints, will be available to future employers, potential clients, regulators, and the public to see via the BrokerCheck system available at either https://brokercheck.finra.org/or https://adviserinfo.sec.gov/. [MJ4]

Customer Complaint Disclosures on Forms U4 and U5

Regulatory agencies require that firms disclose customer complaints that meet reporting thresholds on a financial advisor’s Form U4 and Form U5. According to https://www.finra.org/sites/default/files/form-u4.pdf the general criteria that deem customer complaints reportable include:

• The complaint involves an investment-related matter (defined as pertaining to securities, commodities, banking, insurance or real estate, including but not limited to being associated with a broker-dealer, investment adviser, bank or investment company, among others)
• The complaint was oral or in writing alleging a sales practice violation (defined as conduct involving a customer which involves an alleged violation of a FINRA rule, SEC regulation, or state statute in connection with a securities transaction or the rendering of investment advice)
• It alleges an investment-related, consumer-initiated fraud, sales practice violations, or unsuitable recommendations
• The matter was settled for $15,000 or more (assuming the complaint occurred after 5/18/2009)
• The complaint occurred within the past 24-months and alleged damages of $5,000 or more
• The complaint occurred within the past 24-months and alleged the financial advisor was involved in forgery, theft, misappropriation, or conversion of funds or securities

If any of these thresholds are met, the complaint must be recorded on the individual’s Central Registration Depository (CRD) or the Investment Adviser Registration Depository (IARD) record and is available to future employers. Both Forms U4 and U5 can greatly affect an individual’s career and can invite regulatory investigations, missed career opportunities, and reputational damage. Thus, it is imperative to get ahead of a potential customer complaint by addressing customer concerns as soon as they arise. Here are some best practices:

• Listen to the customer and address his/her concerns as soon as possible.
• Discuss solutions and resolve with the assistance of counsel.
• Document your interactions and get the client’s buy-in before acting.
• If something did occur, make the client whole as soon as possible.

These practices can help alleviate tensions and prevent the situation escalating to a reportable customer complaint. Should a customer complaint be received, act promptly and in good faith. Seek the guidance of experienced counsel to discuss possible negotiation techniques for addressing the client’s issue. You may also need to consider whether a matter needs to be tendered to an insurance carrier or involve counterparties, such as a qualified custodian. By taking these steps, advisors can protect their reputation, maintain client trust, and ensure long-term success in their careers. With years of experience helping clients resolve customer complaints, and guiding financial advisors on how to address disciplinary disclosure events on their Form U4 and U5, Jacko Law Group can assist in prevention, containment, resolution and representation of those who have been affected by customer complaints. For more information and for assistance, contact us today at 619.298.2880 or email [email protected]. [1] INVESTMENT-RELATED generally pertains to securities, commodities, banking, insurance, or real estate (including, but not limited to, acting as or being associated with a broker-dealer, issuer, investment company, investment adviser, futures sponsor, bank, or savings association).