In the financial services industry, reputation is key. Brokers and financial advisors depend heavily on building and maintaining client relationships. Unfortunately, when brokers and advisors are let go from their Broker-Dealer, their Form U-5 can be weaponized against their pursuit of landing a new job and transitioning their client book. When statements on the U-5 are misleading or false, it can lead to significant professional damage to the broker/advisor and leave their book of business in limbo for months after the employment is terminated. This blog provides an overview on this topic, however, the most important items to consider are: 1) Seeking legal advice promptly if you believe your former employer had filed misleading or false information on your Form U-5 and 2) Maintaining all information pertaining to your employment separation.
Why is a Form U-5 even filed?
When a registered financial professional leaves their Broker-Dealer, whether voluntarily or involuntarily, the firm is required to file a Form U-5[1]. The form must indicate the reason for the individual’s registration termination with that Broker-Dealer. If any reason other than “voluntarily” or “deceased” is selected, a reason must be provided. The “Reason for Termination” field is key—it can make or break an individual’s career.
One step in the process sometimes missed by firms, is that if the Form U-5 has been completed for a full termination, a copy of this form and any subsequent amendments, must be provided to the terminated individual. Additionally, there is a field on the Form U-5 for the individual to sign, although the filing can be processed without their signature.
A representative of the firm must also sign the form, attesting the following: “I verify the accuracy and completeness of the information contained in and with this form.”
Once filed, the information becomes part of the individual’s regulatory record, is accessible to regulators and future employers, and may be accessible to the investing public.
Because of its visibility and importance, what is written on a Form U-5 can have lasting consequences for a professional’s career.
What should be reported in the “Reason for Termination” field?
Our firm has seen this field weaponized in clever and not-so-clever ways. We have seen this field provide technically accurate information, but not the specific reason for termination to the detriment of the individual. We have seen the wording exaggerate the reason for termination or mischaracterize it altogether. The devil is in the details when it comes to this field. The field should be accurate and complete. The field itself requires a written response to the following:
“Termination Explanation: If the Reason for Termination entered above is Permitted to Resign, Discharged or Other, provide an explanation below:”
At times, firms will work with the terminated individual or their counsel to draft wording agreeable to both parties. If you or your lawyer are able to negotiate the wording in this field, that is often your best chance at moving to a new employer quickly.
What Is U-5 Defamation?
U-5 defamation claims include allegations that a firm included false, misleading, or exaggerated statements about a departing employee on the Form U-5 that harmed the individual’s reputation, employment prospects, or caused harm by unnecessarily inciting regulatory inquiries or investigations.
Examples of misleading or false U-5 language include:
- Alleging misconduct that never occurred or was not the true reason for termination.
- Exaggerating the seriousness of an internal issue.
- Misleading statements regarding internal investigations.
- Suggesting or affirmatively stating regulatory violations without evidence.
- Disclosing a voluntary departure inaccurately as “Permitted to resign,” “Other,” or “Discharged.”
Prospective employers review these filings and negative disclosures may lead firms to avoid hiring the individual. Regulators also review these filings and their inquiries or investigations prompted by the filings can delay registration or employment opportunities for the individual and become costly for the individual as they respond and defend themselves. And while the individual is sidelined, the firm often swoops in to try to retain the individual’s clients, leaving the individual’s hard-earned book of business in limbo and dwindling.
FINRA Arbitration and Expungement
Most U-5 defamation disputes are handled through FINRA arbitration. A financial professional who believes a firm filed a defamatory U-5 can seek to be compensated for damages (loss of business, etc.), and/or an amendment to the Form U-5. FINRA arbitrations can be expensive and often an expert witness is needed to support the individual’s claims. Individuals left with a diminished book of business or no ability to get a job in the securities industry have had success pursuing this path to right the wrong by the firm and be compensated for their damages. Unfortunately, U-5 defamation is a systemic problem in the securities industry. Our firm has represented countless departing brokers on a nearly endless array of issues. We have also recouped millions of dollars in defamation awards and settlements. If you believe you have been substantially damaged by U-5 defamation or need legal guidance on transitioning to a new firm or negotiating the Form U-5, give our team a call.
[1] ”The Form U5 is the Uniform Termination Notice for Securities Industry Registration. Broker-dealers, investment advisers, or issuers of securities must use this form to terminate the registration of an individual in the appropriate jurisdictions and/or self-regulatory organizations ("SROs"). These instructions apply to the filing of Form U5 electronically with the Central Registration Depository ("CRD®") or the Investment Adviser Registration Depository ("IARD").” General Instructions Form, FINRA.