Regulatory Notice 20-17

FINRA Revises Rule 4530 Problem Codes for Reporting Customer Complaints and for Filing Documents Online

Published Date:
Implementation Date: July 18, 2020

Summary

FINRA is adding two new Rule 4530 Problem Codes related to SEC Regulation Best Interest (Reg BI) and Form CRS, and making related amendments to the existing Rule 4530 Problem Code related to suitability. Starting on July 18, 2020, firms can use new Problem Code 16–Reg BI and new Problem Code 17–Form CRS, when applicable, to report customer complaint information and required documents filed under Rules 4530(f) and (g).1

In addition, FINRA is retiring Rule 4530 Problem Code 69–DOL Fiduciary Rule and making other non-substantive stylistic changes to the Problem Codes.

The amended and new Rule 4530 Product and Problem Codes are provided in Attachment A.

Questions concerning this Notice should be directed to:

  • Anthony Cavallaro, Senior Vice President, Central Review Group, at (646) 315-7319 or by email; or
  • Michael Garawski, Associate General Counsel, Office of General Counsel, at (202) 728-8835 or by email.

Background & Discussion

FINRA Rule 4530 (Reporting Requirements) requires firms to report, among other things, quarterly statistical and summary information regarding written customer complaints.2 All customer complaint information must be electronically reported to FINRA. In addition, the rule requires firms to file with FINRA copies of specified criminal actions, civil complaints and arbitration claims,3 which firms may file online.4 Firms are required to select the appropriate Rule 4530 Problem Code when reporting quarterly statistical and summary customer complaint information and on the form that is completed when filing required documents online.5

FINRA periodically reviews the problem codes to determine whether the codes need to be revised to provide more clarity and whether new categories need to be added. Based on this review, FINRA is adding two new problem codes, revising one problem code, and retiring one problem code. The substantive changes are described below.

Reg BI, Form CRS and Suitability

On June 5, 2019, the SEC adopted Reg BI under the Securities Exchange Act of 1934.6 Reg BI establishes a “best interest” standard of conduct for broker-dealers and associated persons when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities, including recommendations of types of accounts. The SEC also adopted a new rule to require broker-dealers and investment advisers to provide a brief relationship summary (Form CRS) to retail investors.7 Firms must comply with Reg BI and Form CRS by June 30, 2020.

To address issues that may arise in connection with a firm’s compliance with Reg BI and Form CRS, FINRA is adding new Problem Code 16–Reg BI and new Problem Code 17–Form CRS to the current Rule 4530 Problem Codes. Firms should use Problem Code 16–Reg BI when a reportable matter involves allegations concerning possible violations of Reg BI. This encompasses allegations that recommendations of securities or investment strategies involving securities, including recommendations of account type, made to retail customers were not in the best interest of the retail customer.8 It also covers allegations of possible violations of Reg BI’s four component obligations (Care, Disclosure, Conflict of Interest, and Compliance).9 Firms should use Problem Code 17–Form CRS when a reportable matter involves allegations concerning the firm’s Form CRS or issues regarding delivery of Form CRS to retail investors.

FINRA also is making related revisions to the description of Problem Code 04–Suitability to help guide member firms’ use of that code after the Reg BI compliance date, especially considering that the reporting obligation under FINRA Rule 4530(d) and the choice of problem code are based on the alleged activity in the complaint.10 The revised description of Problem Code 04–Suitability explains that, for allegations concerning activity that occurred after the Reg BI compliance date of June 30, 2020, firms should consider whether to use Problem Code 16–Reg BI, even if the allegations contain suitability terminology.      

Problem Codes 16 and 17 will be available for Rule 4530 reporting purposes starting on July 18, 2020. FINRA has established July 18, 2020, as the start date to ensure that the new problem codes are not available when firms report statistical and summary information regarding written customer complaints received during the second quarter of 2020 (of which the last day is the Reg BI compliance date).11 The new problem codes will be available for reporting written customer complaints received during the third calendar quarter (July 1, 2020, through September 30, 2020), which has a reporting deadline of October 15, 2020.

Because firms must comply with Reg BI and Form CRS starting on June 30, 2020, there may be situations regarding activity occurring between July 1-17, 2020, where the new problem codes would be the appropriate code but are not yet available. In those situations, firms should wait to make Rule 4530 reports and filings until the new problem codes become available on July 18, 2020.

Retiring of Problem Code 69–DOL Suitability Rule

In 2016, the United States Department of Labor (DOL) issued a final rule to amend the definition of “fiduciary” in 29 CFR 2510.3-21 and two related exemptions (together the “DOL Fiduciary Rule”).12 To address these changes, FINRA added new Problem Code 69–DOL Fiduciary Rule.13 The DOL Fiduciary Rule was subsequently vacated in toto by the United States Court of Appeals for the Fifth Circuit.14 In light of this development, FINRA is retiring Problem Code 69–DOL Fiduciary Rule, effective July 18, 2020.15

Availability of the New and Revised Codes

The revised and new product and problem codes are provided in Attachment A and are also available on FINRA’s website.

Endnotes

  1. For purposes of reporting statistical and summary information regarding written customer complaints, firms may use new Problem Codes 16 and 17 to report information regarding complaints received during the third calendar quarter (July 1, 2020, through September 30, 2020). The third calendar quarter report is due by October 15, 2020.
  2. See FINRA Rule 4530(d). The statistics that firms report provide FINRA with important regulatory information that assists with the timely identification of potential sales practice and operational issues.
  3. See FINRA Rule 4530(f).
  4. See FINRA Rule 4530(g). Firms also have the option of filing the documents required under FINRA Rule 4530(f) via mail or email.
  5. See 4530 Complaints Reporting Form Instructions; Regulatory Notice 13-08 & Attachment B (4530(g) Online Form) (February 2013).
  6. See Securities Exchange Act Release No. 86031 (June 5, 2019), 84 FR 33318 (July 12, 2019).
  7. See Securities Exchange Act Release No. 86032 (June 5, 2019), 84 FR 33492 (July 12, 2019).
  8. Reg BI defines “retail customer” as a natural person, or the legal representative of such natural person, who receives a recommendation of any securities transaction or investment strategy involving securities from a broker, dealer, or a natural person who is an associated person of a broker or dealer, and uses the recommendation primarily for personal, family, or household purposes. See 17 CFR 240.15l-1(b)(1).
  9. When reporting quarterly statistical and summary information regarding written customer complaints, firms are required to provide information about the complaint, including a “Related to” section that contains six options (“registered representative,” “non-registered rep associated person,” “firm,” “municipal advisory services,” “affiliate,” or “other”). FINRA reminds firms to select all of the “related to” options that apply. See 4530 Complaints Reporting Form Instructions, at p. 10.
  10. See Rule 4530 Frequently Asked Questions, Number 2.12.
  11. The reporting deadline for customer complaints received during the second calendar quarter (April 1, 2020, through June 30, 2020) is July 15, 2020.
  12. See 81 FR 20946, 21002 and 21089 (April 8, 2016).
  13. See Regulatory Notice 17-21 (June 2017).
  14. See Securities Exchange Act Release No. 86031 (June 5, 2019), 84 FR 33318, 33322 n.32 (July 12, 2019) (citing Chamber of Commerce v. U.S. Dep’t of Labor, 885 F.3d 360 (5th Cir. 2018)).
  15. FINRA also is making non-substantive stylistic changes, including ones to the descriptions of Problem Code 20–Research, Problem Code 21–Product Origination/Investment Banking, Problem Code 22–Trading, Problem Code 26–Regulation B, Problem Code 27–Regulation E and Problem Code 28–Regulation S-P. Currently, the descriptions of Problem Codes 26, 27 and 28 state that they are usually coded as a “‘firm vs. RR’ problem,” suggesting inaccurately that the forms used for Rule 4530 reporting and filing purposes request information about whether the reportable event involves a dispute between the firm and a registered representative. Similarly, the descriptions in Problem Codes 20, 21, and 22 state that they are usually coded as a “‘Firm’ vs. ‘RR’ problem.” FINRA is clarifying these problem codes to state that they are usually coded as a “‘Firm’ (rather than an ‘RR’) problem,” meaning that “Firm” would usually be the selection in the “related to” field on the Form 4530 Complaint Reporting Form when those problem codes are selected.