Escalating Complaints and/or Potential Red Flags

When a customer complaint is received by a broker-dealer, the appropriate personnel at the member firm must promptly be notified. This is also the case when a red flag is spotted concerning a customer account. Personnel who may require notification include the account representative, the principal over that account, the branch manager, or member of the compliance team. The process of alerting the appropriate "higher ups" is referred to as escalation. Like an escalator, this process raises something to a higher level.

A complaint is a written statement by a customer-or a person acting on behalf of a customer-that alleges any grievance or dispute connected to a securities transaction or the handling of the account. Maybe a customer was recommended an investment that has suffered a large loss, an investment she now feels was unsuitable. Or, maybe the customer checks her monthly account statement and sees three purchases she doesn't recognize, with the agent claiming she told him to execute the trades.

If no resolution is reached, the firm must report the complaint to FINRAs director of arbitration. And, if the complaint involves an allegation of theft, forgery, or misappropriation of customer assets, it must be reported within 10 business days at the latest.

Broker-dealers must maintain files for customer complaints, with notes indicating what happened and how it was resolved, endorsed by a principal. Copies of customer complaints are maintained at the supervising OSJ. Within 15 days after the end of each calendar quarter member firms must electronically file information on all cus¬tomer complaints to FINRA.

Copies of customer complaints, and the quarterly filings, are required to be maintained for three years, as are many broker-dealer records.

Red flags include anything that looks suspicious to broker-dealer personnel. For example, excessive customer complaints against a registered representative often signal a pattern that should be brought to the attention of the firm's management. Any suspicious activity involving the movement of funds or securities should be taken as a red flag. And, if the account of a deceased individual shows any activity, that is an¬other example of a red flag.

Also, if the back office finds discrepancies between the address where customer account documents are delivered and the street address provided by the customer, they should treat this is a red flag. In such a case, a registered representative engaging in excessive or inappropriate transactions may be trying to mail all documents to a PO box he controls. Maybe he is engaging in expensive annuity switches he doesn't want his customer to know about. If he signs the customer's name to the paperwork and sends all the paperwork to his own PO box, he might get away with it.

For a while. The broker-dealer's procedures for handling red flags, including the proper steps for escalation to the appropriate supervisors, are designed to prevent and detect such fraudulent sales practices.


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