In the course of conducting investment advisory business, no matter how diligent you are, at some time a customer complaint may arise. It is typical that downturns in the securities markets lead to an increase in customer complaints. What is the proper course of action for you and your registered investment adviser to take if you do receive a complaint?
Initially, there may be a question about whether a particular communication from your customer is considered a complaint. If you have had any communication with a customer that you suspect may be interpreted as a complaint, you should promptly share that communication with your registered investment adviser’s chief compliance officer. In the event that you are also affiliated with a broker-dealer as a registered representative, you will need to share this communication with your broker-dealer’s compliance department. If you have errors and omissions professional liability insurance (“E&O”) coverage, any complaint will need to be promptly submitted to your E&O carrier. If your registered investment adviser’s chief compliance officer is not experienced in handling and reporting customer complaints, then you should not hesitate to request the assistance of outside legal counsel with expertise in securities law. Your registered investment adviser’s chief compliance officer, as well as your broker-dealer’s compliance department, if applicable, and outside legal counsel will help you determine whether the communication will need to be treated as a customer complaint and how best to respond to the customer’s communication.
Generally, any verbal or written grievance by a customer should be treated as a complaint. Your registered investment adviser, as well as your broker-dealer, if applicable, likely have policies and procedures in place which require you to promptly forward any complaints to the chief compliance officer or other designated compliance personnel. It is important that all customer complaints are taken seriously, fully investigated and responded to in a prompt manner.
A suggested best practice is for the registered investment adviser’s chief compliance officer or other designated complaint analyst to promptly acknowledge receipt of the complaint to the customer. The acknowledgment to the customer should indicate that the customer’s concerns will be investigated, that the individual(s) reviewing the concerns may contact the customer for additional information, and that the registered investment adviser will provide a response to the customer upon the conclusion of its investigation. It is a good idea to provide the customer with a reasonable expectation about when the customer may receive a response.
It is critical that the customer complaint is thoroughly investigated, which involves gathering all of the material facts and interviewing the key individuals associated with the complaint. The chief compliance officer will need to review and assess the facts discovered during the investigation and determine what constitutes an appropriate resolution. Use of experienced outside legal counsel may be valuable in conducting an investigation of the complaint.
If there is a need or an anticipated need to keep certain communications or work product confidential due to the likelihood of arbitration or litigation, it will be necessary to retain outside legal counsel to conduct the investigation and prepare your defense in order to preserve the confidentiality of such communications or work product under attorney-client privilege. You should ask your attorney to explain the requirements and limitations of this privilege in greater detail. It is important that the investment adviser representative, compliance staff, and any other parties involved with the complaint understand that all information and documentation leading up to the complaint as well as information and documentation (if not subject to attorney-client privilege) created per the review of the complaint, including all written and verbal correspondence, may be discoverable in a formal proceeding such as arbitration or litigation or by regulators who conduct an investigation of the complaint.
If the review determines that a customer complaint has merit, then the chief compliance officer or outside legal counsel should make good faith efforts to fairly resolve the complaint. It is suggested that any settlement documents should be prepared by legal counsel to assure that the settlement is legally binding on the parties. If the review determines that a complaint does not have merit, the chief compliance officer or outside legal counsel usually provides a thorough explanation to the customer, citing relevant facts and clearly stating the reasons supporting that conclusion. Prompt responses to customer complaints can be an important risk management strategy that can result in a reduction of the number of arbitration and litigation claims filed against an investment adviser representative and the registered investment adviser.
Finally, in addition to assessing whether or not the customer complaint has merit, the chief compliance officer will need to make a determination about whether the complaint and its resolution will be reportable on the Form U4 for the investment adviser representative and/or on the registered investment adviser’s Form ADV. Similarly, if you are affiliated with a broker-dealer as a registered representative, the broker-dealer will have reporting requirements, including Form U4 updates. An investment adviser representative who fails to promptly report a complaint may face disciplinary action from the investment adviser representative’s affiliated registered investment adviser, broker-dealer firm, if applicable, as well as regulatory authorities. Likewise, a registered investment adviser’s failure to comply with the applicable state or SEC regulatory reporting requirements can lead to disciplinary action of the firm.
Posted by Bryan Hill
Labels: Customer Complaint, Form U4
