Customer Complaints

When a customer has a grievance about how their account has been handled, the firm must follow specific procedures. Proper complaint handling is both a regulatory requirement and a frequent exam topic.

What Counts as a Customer Complaint?

A customer complaint is any grievance by a customer (or any person authorized to act on behalf of the customer) involving the activities of the member firm or an associated person in connection with:

• The solicitation or execution of transactions
• The disposition of securities or funds in the customer's account

This is a broad definition. It covers everything from an unsuitable recommendation to a missing dividend payment to unauthorized trading. Both written and verbal complaints count, but written complaints trigger additional recordkeeping requirements (see below).

How Should a Rep Handle a Complaint?

When a registered representative receives a customer complaint, the procedure is straightforward:

1. Immediately notify their supervisor: this is the first and most important step
2. Never attempt to resolve the complaint independently without supervisory involvement
3. The firm must investigate the complaint and respond in a timely manner
4. The firm must not retaliate against a customer for filing a complaint

Think of it this way: The rep's job is to be a messenger, not a problem-solver. Report up, then step back. Any attempt to personally settle a complaint (even offering money out of pocket) is a violation.

Exam Tip: Gotchas

If a question asks what a rep should do first after receiving a customer complaint, the answer is always "notify the supervisor." The rep should never try to settle the complaint on their own, offer personal compensation, or ignore the complaint.

How Long Must Complaint Records Be Kept?

FINRA has specific requirements for how written customer complaints must be maintained:

• Each member must keep a separate file of all written customer complaints at each office of supervisory jurisdiction (OSJ) that relate to that office
• The file must include the complaint and any action taken by the member
• Alternatively, the firm may keep a separate record of complaints with a clear cross-reference to the files containing related correspondence
• Customer complaint records must be preserved for at least 4 years

Exam Tip: Gotchas

Written customer complaints must be kept for 4 years under the customer-complaint recordkeeping rule. This is a unique retention period the exam loves to test. For comparison: trade confirmations are kept for 3 years, and account records are kept for 6 years. Also, complaints are filed at the OSJ level, not at each branch office.

What Must Be Reported to FINRA?

Beyond internal recordkeeping, firms must report certain complaint-related events to FINRA:

• Firms file quarterly statistical summaries of customer complaints received
• Certain serious events must be reported within 30 calendar days, including:
  • Any customer complaint involving theft, misappropriation, or conversion of funds or securities
  • Any customer complaint involving forgery
• A settlement of $15,000 or more involving the associated person, and any arbitration award or civil judgment against a named respondent regardless of amount, must be disclosed on the associated person's Form U4 (and on Form U5 if the person leaves the firm)
• Separately, a written customer complaint received in the past 24 months that alleges a sales practice violation and claims $5,000 or more in compensatory damages must be disclosed on Form U4 on the allegation alone, whether or not it is ever settled or found to have merit

Exam Tip: Gotchas

Form U4 has two different dollar triggers, and they are not the same event. A settlement discloses at $15,000 or more. A written complaint discloses at $5,000 or more in claimed damages, on the allegation by itself, with no settlement and no finding of merit required. A complaint settled for $12,000 escapes the settlement trigger and still discloses if the claim was $5,000 or more.

The $25,000 figure belongs to a different rule. It is the threshold for the firm's reporting to FINRA under the reporting-requirements rule when the firm itself is the named respondent, not a Form U4 disclosure threshold. Do not attach it to Form U4.

Are Options Complaints Handled Differently?

Options-related customer complaints carry an additional recordkeeping requirement under FINRA options rules:

• The firm must keep a separate, central file (log) of all options-related complaints at its principal place of business or another designated principal office (not just any branch or ordinary office)
• A complaint received at a branch office must be forwarded to the office holding the central file within 30 days of receipt (a copy stays at the branch)
• Options complaints are not sent to the options exchange or the SEC: this is an internal central-file obligation on top of standard FINRA complaint recordkeeping

What Happens if a Complaint Is Mishandled?

Failure to properly handle or report customer complaints can result in serious consequences:

• Hiding, destroying, or altering complaint records is a serious violation that can lead to criminal charges
• Even negligent mishandling (not just intentional misconduct) can trigger regulatory action

What Should You Check on Exam Day?

• The rep's first move on any complaint is always notify the supervisor; never settle it personally, even with a personal offer.
• Written complaints are kept 4 years at the OSJ, not each branch office; both written and verbal complaints count as complaints.
• Form U4 discloses a settlement at $15,000+ and a written complaint at $5,000+ in claimed damages on the allegation alone; the $25,000 figure is the firm's FINRA reporting threshold, not a Form U4 one.
• Theft, misappropriation, or forgery complaints report within 30 calendar days.
• Options complaints go to the firm's central file, not the exchange or SEC, within 30 days of the branch receiving them.