Set the record straight on customer complaints

Few things are more damaging to a financial adviser’s career than a customer complaint filed in the Central…

Few things are more damaging to a financial adviser’s career than a customer complaint filed in the Central Registration Depository and the Financial Industry Regulatory Authority Inc.’s BrokerCheck databases.

In addition to registration and background information regarding advisers, these databases also capture certain customer complaints that have been lodged against advisers.

Considering that both databases are routinely used by prospective employers and investors when considering whether to hire or retain an adviser, a single unfounded customer complaint can affect an adviser’s ability to transition between firms, negotiate the best compensation package or attract new clients. In a worst-case scenario, these complaints can effectively derail an adviser’s career.

A prospective client or employer may not have the time or patience to investigate whether a complaint against an adviser is valid. It is much easier merely to choose an adviser with a clean record.

That is why it is critical for advisers to understand how they can obtain expungements of claims that are false or erroneous.

Outlined below are two strategies. One is fairly well-understood, while the other is less well-known.

Expungement during a pending Finra arbitration. Requests for expungement typically arise in the context of a Finra arbitration that has been initiated by a customer. When such an arbitration is initiated, the adviser can request expungement relief in his or her answer.

Either after the Finra arbitrators enter a ruling against the customer or the parties reach a settlement, the arbitrators hold a hearing on the adviser’s expungement request. Not all complaints qualify for expungement. In determining whether an adviser is entitled to expungement, the arbitrators must find that: 1) the complaint was factually impossible or clearly erroneous, 2) the adviser wasn’t in-volved in the alleged violation, or 3) the complaint was false. See Finra Rule 2080.

At the hearing, the adviser presents evidence demonstrating why the complaint should be expunged, and the customer has the opportunity to dispute this evidence. If the arbitrators grant the adviser’s request for expungement, the adviser must then obtain confirmation of the decision from a court of competent jurisdiction before Finra will execute the expungement directive. Unless the adviser has obtained a written waiver from Finra, Finra must be named as a party to the confirmation hearing, giving it the opportunity to oppose the request. The customer must also be named as a party, for the same reason.

Expungement of older customer complaints. The first path to ex-pungement is the more clearly understood method, but some advisers wrongly assume that it is the only method. What happens if, for example, arbitration was never filed, the adviser wasn’t a party to the arbitration or the arbitration is already closed? These advisers aren’t out of luck. Rather than initiating a new Finra arbitration and incurring the hefty Finra filing fees that go along with these arbitrations, the adviser can go directly to the court with his or her expungement request. The adviser can file an action naming the customer and Finra as defendants/respondents.

Different courts have different procedures for how these actions proceed, but they can usually be quickly resolved by the filing of a motion or a brief hearing. Many times, particularly where the complaint is several years old, the customer — and sometimes Finra — won’t dispute the action.

STREAMLINE THE PROCESS

Advisers can streamline the process if they know from the onset that the customer will agree to their request by obtaining an affidavit of no opposition from the customer. In many of these cases, Finra will also agree not to contest the request.

If the request isn’t contested, most courts will readily grant the adviser’s request for expungement. And upon sending the order to Finra, Finra will expunge the complaint.

Another advantage of initiating an action with the court is that that the court may not be bound by the Finra Rule 2080 factors when making its expungement determination. Rather, a court can base its determination upon principles of basic fairness or equity.

The application of this equitable standard gives advisers much more latitude in the arguments that they can make in support of their request and will likely result in more successful expungement requests.

Elizabeth Long ([email protected]) is counsel at Buchanan Ingersoll & Rooney, specializing in litigation of post-employment disputes.