FINRA Allows For Leeway In Settling Claims Under The Reporting Thresholds

Federal – Securities & Investments Professional Liability

Key Points:

•  FINRA arbitration claims settled under $15,000 are not reportable on a broker's CRD after 24 months.
• Settlements to multiple customers in one arbitration may be treated as a separate settlement for reporting purposes.
• Legal fees and costs paid are not included in the settlement amount paid for FINRA reporting purposes.

A customer complaint against a stockbroker will remain on the broker's Central Registration Depository (CRD) record permanently when the claim is settled for over $15,000. If the claim is settled for under $15,000, then the complaint is removed from the CRD after 24 months. May a complaint settled for more than $15,000 ever be considered as a settlement for less than $15,000 for FINRA purposes and removable in 24 months? Yes.

Form U4 contains the disclosure questions with respect to customer complaints. Question 14I(1) of Form U4 asks whether a broker has been named as a respondent in an investment-related customer-initiated arbitration or civil litigation in which it was alleged that the broker was involved in one or more sales practice violations and which was settled for $15,000 or more. If the customer complaint meets all the reporting requirements contained within this question, it is disclosed and reported on the broker's CRD, where it remains permanently. If the answer to Question 14I(1) is "no," because the customer complaint was settled for less than $15,000, then the customer complaint will remain on the broker's CRD for only 24 months (if the compensatory damages alleged by the customer were $5,000 or more).

Registered representatives are always concerned about customer complaints on their CRD since they are available for review by potential clients. As a result, brokers oftentimes indicate that they want the case to proceed through arbitration, where they believe they will be victorious and the claimant's claims will be denied by the panel. If the panel denies the claims after a full evidentiary hearing, then the complaint is removed from the broker's CRD.

However, there is expense and risk associated with proceeding through arbitration, and broker-dealers sometimes prefer to minimize this risk by way of a settlement. A brokerage firm's desire to settle a FINRA arbitration may be hampered by the protests of the registered representative who, although he/she may not be responsible for paying the legal bills or award, would like to proceed to arbitration to clear his/her name.

Many times, the claimant will not accept a settlement of an amount less than $15,000, and the settlement negotiations stall when the payment of some relatively small additional amount may be acceptable to the claimant. In these type of situations, creative approaches allow a payment to a claimant and their counsel in excess of the $15,000 reportable threshold, but still allow for the settlement amount to remain under $15,000 for FINRA reporting purposes. For example, if there are multiple claimants who jointly file a Statement of Claim, FINRA will permit a settlement payment to each claimant of under $15,000. These payments, totaling more than $15,000, would be considered as separate settlements for separate complaints, and each would be treated as a settlement of under $15,000, removable after 24 months. The caveat to this approach is that the broker's CRD will have to be amended to reflect the additional separate complaints for the applicable 24-month period.

Another way around the $15,000 reportable threshold is through payment of attorney's fees. Attorney's fees paid to a claimant's counsel are not included in the settlement amount for CRD reporting purposes. A broker-dealer may pay such fees to claimant's counsel in excess of the $15,000 settlement reportable limit without negating the need to report such as a settlement for only 24 months.

In addition, forum fees are not included in any settlement amount. A broker-dealer can reimburse claimants their forum fees incurred in connection with the filing and processing of the arbitration without having any effect on the reporting requirement limits.

These approaches to the characterization of payments to claimants and their counsel are discussed by FINRA in guidance on its website. This FINRA website guidance is entitled "Form U4 and U-5 Interpretive Questions and Answers." These questions and answers refer specifically to the reporting of customer complaints, settlement limits and monies which can be paid to claimants and their counsel in connection with the settlement. This FINRA Question and Answer Advisory specifically states that payments made for attorney's fees and reimbursement of FINRA fees incurred by a claimant are not considered to be part of any settlement.

Framing payments to claimants and their counsel in this fashion may result in settlements that will be acceptable both to claimants and brokers concerned about their permanent CRD records. Counsel should be aware of any of the aforementioned approaches to adequately represent their stock broker clients.

*Denis, a shareholder in our Philadelphia, Pennsylvania, office, can be reached at 215.575.2779 or dcdice@mdwcg.com.

Defense Digest, Vol. 18, No. 2, June 2012