Supervisory Systems - Complaint Handling


Investigations
NASD (now known as FINRA) Rule IM-3110 defines a "complaint" as any written statement of a customer (or person acting on behalf of a customer) alleging a grievance in connection with the solicitation or execution of any securities transaction or the disposition of the customers' securities or funds. Each OSJ must maintain a record of all written complaints as well as actions taken as a result of the complaints.

NASD (FINRA) Rule 8000 requires that member firms keep a current copy of the FINRA Manual readily accessible for customers to review. It also gives the FINRA the right to require any registered person to provide information regarding an investigation, complaint or other proceeding orally, in writing, or electronically, and to testify under oath. It also has the right to inspect and copy books, records or accounts of the member or person in respect to such a proceeding.

Code of Procedure
NASD (FINRA) Rule 9000 details the Code of Procedure that must be followed if the FINRA determines that a customer complaint should be investigated. The Department of Enforcement issues a formal complaint and names a Hearing Officer to preside over the proceeding. The Hearing Officer also appoints panelists (who are all from the securities industry) to serve as a jury.

The registered person (respondent) must respond to the complaint in writing within 25 days of receipt. If no response is made, a second notice is sent that must be answered within 14 days. Failure to respond to this second notice results in a default guilty decision.

When the respondent answers the complaint, he or she may request a hearing, which is held before the Hearing Officer and the two panelists. A pre-hearing conference may be requested, and will be scheduled within 21 days of the request. The hearing itself is conducted much like a trial. Witnesses are called to testify and may be cross-examined, evidence is introduced, etc. The panel renders a decision within 60 days of the hearing.

Should a registered person be found guilty, certain sanctions may be imposed. Sanctions may include one or more of the following:

  • Fine
  • Censure
  • Suspension
  • Expulsion
  • Barring the member from association with any other members

If suspension is imposed, the registered person may not continue to work for a member firm in any capacity. During this time, the member may not pay the registered person any salary, commission or other income that could have been earned during the suspension. However, they may pay out such income during the suspension that was earned prior to the suspension.

When sanctions are made, the effective date is specified by the Hearing Officer, but may be no sooner than 30 days after the written decision is handed down. Sanctions may be appealed within 25 days of the decision. If the appeal is not granted, the appealing party may request that the case be taken to the SEC and, finally, the federal court system.

Alternatives
One option available to the respondent is to make an offer of settlement. To be considered, the offer must meet the following criteria:

  • The offer must be in writing.
  • It must include the specific rule or law that the respondent violated.
  • It must describe the acts in which the respondent engaged.
  • It must include a statement agreeing to the findings of fact in the complaint.
  • It must propose a sanction within the FINRA guidelines.

Submitting such an offer waives the respondent's right to a hearing and the right to appeal. If the Department of Enforcement accepts the offer, it must be submitted for approval to the National Adjudicatory Council (NAC) for review. Unless the offer is contested by the NAC, it is then accepted and final.

If the Department of Enforcement does not agree to the offer, the offer and a written statement of opposition is sent to the Hearing Officer. The Hearing Officer will then arrange a settlement conference and try to work out a compromise.

In some cases involving minor rule violations (MRV), the court may offer a summary complaint procedure. To accept this procedure, the respondent must not dispute the charges and must waive his or her right to a hearing. In this case, the respondent signs an Acceptance, Waiver and Consent (AWC), in which he or she accepts the finding of violation, consents to sanctions and waives the right to appeal.

Minor violations that are not disputed are subject to a maximum fine of $5,000 for a first offence, and $10,000 for a second offence. The summary complaint procedure is available for offenses such as:

  • Failure to keep books and records as required by the SEC.
  • Failure to maintain required files for advertising and sales literature.
  • Failure to have advertising and sales literature approved prior to use.
  • Failure to file advertising and sales literature with the FINRA within the correct time period.
Code of Arbitration Procedure and Insider Trading
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