As a securities attorney, I work with registered reps and advisers (“Broker(s)”) who are in transition because they have been terminated or permitted to resign by their current firm. The most frequent and important questions that they ask: what do I do if the firm discredits me on my Form U5? For financial professionals, a good reputation is mission-critical and central to their livelihood.
the form u-5
A Form U-5 follows the Broker anywhere and everywhere in the industry. Any accusation of misconduct can prevent the Broker from obtaining another job in the securities industry. When a licensed professional is terminated for any reason, FINRA rules require the firm to complete a U-5. Form U5 requires firms to indicate whether a termination was full, and if so, give a Reason for Termination (“Discharged,” “Other,” “Permitted to Resign,” “Deceased,” or “Voluntary”), and a Termination Explanation if the reason for termination was “Permitted to Resign,” “Discharged,” or “Other.”
If the separation was unfriendly, or if the Broker was simply "permitted to resign," the firm must give a reason. It could cite an innocuous sounding "mutual agreement," or it could say a lot more. FINRA requires member firms to provide sufficient detail when responding to Form U5 questions such that a reasonable person can understand the circumstances that triggered the affirmative response. As such, there are several steps a Broker can take to avoid becoming radioactive to clients and prospective employers.
informal attempts at resolution
and reputation salvage
If the Broker has been terminated or permitted to resign, the first recommendation is to contact the former firm’s compliance department in writing. While the firm has 30 days to post the Form U5 to the CRD it will generally occur sooner than 30 days, which makes time of the essence. First, ask when the firm expects to publish the Form U5, and, more importantly, ask what the firm intends to say about the reasons for the termination. Second, request an opportunity to review and provide comments to the compliance department on the U5 language before it is finalized.
While there is no mechanism to force the Broker’s old firm to change the language if it is very negative and potentially harmful; however, if specific statements are identified by the Broker to be demonstrably false or misleading, an astute compliance department, will take these comments into consideration before finalizing the U5 text. Hiring a lawyer to handle this attempted negotiation and comment process, should make the firm take the objections more seriously, and raise the chances of limiting reputational harm at an early stage.
When the old firm posts the Form U5 to the CRD, it will send a copy of what it filed to the Broker. If the lobbying efforts were not successful and the U5 has false or misleading statements about the circumstances of the Broker’s departure, there are still things that can be done to salvage the situation and do damage control. The first is to add the Broker’s side of the story to the public record available on FINRA Broker Check. FINRA permits Brokers who have not yet joined a new firm to submit a “Broker Comment” request form to provide context to information disclosed on FINRA Broker Check, such as the prior firm’s stated basis for termination. The Broker Comment form must be signed and notarized before sending it to FINRA and cite the specific section(s) of the FINRA Broker Check form to which the comments are directed. FINRA will review this submission and will add the rebuttal to the FINRA Broker Check entry within 30 days if it meets the following criteria:
• The Broker is not currently registered with a FINRA Member Firm;
• The comments relate to the FINRA Broker Check report (as opposed to that of a former colleague);
• The form is written in first-person narrative (to make it easy for the reader to understand); and,
• The form does not contain confidential or identifying information about customers or other third parties; isn’t offensive or defamatory; or, raise privacy-related concerns.
If the Broker has already joined a new firm, the mechanism for filing a rebuttal is by filing an amended Form U4 with the CRD.
How Does a Broker Get
a Damaging U5 Expunged?
If submitting a FINRA Broker Comment form is not enough to undo the damage caused by the old firm’s filing a truly false and damaging Form U5, what is the next step? At this point, the first step is to write the former firm and demand a retraction, pointing out what specific statements are defamatory. Although letter writing, as a negotiation tactic, rarely succeeds, it demonstrates a good faith effort to resolve the dispute quickly and informally before pursing the final recourse – arbitration before FINRA against the firm.
A U-5 arbitration case can be expensive and time consuming. Legal fees can go as high as $200,000, and resolution can take up to a year. However, this process may be the only recourse for the Broker to salvage a career and reputation. In reality, the only way to get a record clear is to go through a FINRA U5 arbitration. Arbitrators have consistently shown that they want to be equitable. If the Form U5 filed by the former firm is false and has had a serious negative impact on business, clients and job prospects, it makes economic sense to bring legal action to get the U5 amended or expunged.
Often, such arbitration cases include defamation claims against the firm, but making defamation claims is a matter of state law and strategy. The first step in the process is filing an arbitration case against the former firm with the Dispute Resolution department at FINRA. Only FINRA can expunge information from the CRD system, and then, only if it is directed do so to by an order issued by an arbitration Panel or a court.
FINRA will expunge information from the Central Registration Depository, without a court order, if an arbitration panel awards expungement relief based on the defamatory nature of the information contained in the U5, and explicitly states in the award that it is recommending expungement on that basis.
When will an arbitration panel order FINRA to expunge or amend the Form U5? The grounds are limited. The Broker will need to prove that the U5 is defamatory, misleading, inaccurate or erroneous. Even if not bringing a separate defamation claim, it is advantageous to allege that the U5 filing was defamatory because if the arbitration Panel agrees and issues an Award that expressly states that the U5 was defamatory, the additional step of going to court to have the Award confirmed and converted into a civil judgment can be avoided.
If at the conclusion of the arbitration, the Panel does not order the U5 be expunged on the grounds it is defamatory, but relief is obtained on another basis – such as the filing is misleading or inaccurate – then a separate lawsuit will have to be filed in a civil court to convert the arbitrators’ Award to a court judgment. Once that process is completed, the final step is to present the court judgment confirming the arbitration Award to FINRA. At that point, FINRA is required to modify the record on the CRD to incorporate the specific changes that the arbitrators and the court directed – whether as to the termination reason, the termination comment text, or both.
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