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GOINGINDIE BLOG

Spin Doctor: Managing Your U5 Process After an Involuntary Termination

by Scott C Matasar, Esq

As a securities regulatory attorney, I regularly work with advisers who are in transition because they have been terminated or permitted to resign by their current firm.  One of the most frequent questions I get is: what do I do if my firm smears me on my Form U5?  As a financial professional, maintaining your good reputation is mission-critical, and there are several steps you can take to avoid becoming radioactive to your clients and prospective employers.

If you have been terminated or permitted to resign, the first thing to do is to contact your former firm’s compliance department in writing.  While the firm has 30 days to post the Form U5 to the CRD it often can happen sooner than that, so time is of the essence.  Ask when the firm expects to publish the Form U5.  Ask what the firm intends to say about the reasons it terminated you.  Demand an opportunity to review and comment on the U5 language before it is finalized.  While you cannot force your old firm to change the language if it is not to your liking, if you identify specific statements that are demonstrably false or misleading, if it is smart your prior firm will take your comments into consideration before finalizing the U5 text.  Of course, hiring a lawyer to handle this process on your behalf will make the firm take your objections more seriously, and it raises your chances of limiting the harm to your reputation at an early stage.

When your old firm posts your Form U5 to the CRD, it will send you a copy of what it filed.  If your lobbying efforts were not successful and the U5 has false or misleading statements about the circumstances of your departure, there are still things you can do to help yourself and salvage the situation.  The first is to add your side of the story to the public record available on BrokerCheck.  FINRA permits advisors who have not yet joined a new firm to submit a “Broker Comment” request form to provide context to information disclosed on BrokerCheck, such as your prior firm’s stated basis for termination[1] You must sign and notarize the Broker Comment form before sending it to FINRA and cite the specific section(s) of your BrokerCheck form you are commenting about.  FINRA will review your submission and will add your rebuttal to your BrokerCheck entry within 30 days if it meets the following criteria:

•  You are not currently registered with a FINRA Member Firm;

•  Your comments relate to your BrokerCheck report (as opposed to that of one of your former colleagues);

•  Your 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 other privacy-related concerns.

How Do You Get a Damaging U5 Expunged?

But what do you do if even submitting a Broker Comment form is not enough to undo the damage your old firm has caused you by filing a truly false and damaging Form U5? Unfortunately, these things do happen and from time to time.  I have even seen firms use U5 filings as an economic weapon to try to persuade the clients of the terminated advisor to fire him and keep their accounts at the firm.

If you find yourself in that unenviable position, the first step is to write to your former firm and demand a retraction, pointing out what specific statements are defamatory.  Although this rarely succeeds, it shows that you tried to resolve the dispute quickly and informally before pursing your final recourse – arbitration.

If you truly feel that the Form U5 your former firm filed is false and has had a serious negative impact on your business, and it makes economic sense, your last resort is to bring legal action to get your U5 amended or expunged.  Often times, such lawsuits also include making defamation claims against the firm, but whether to do so is a matter of state law and of strategy between you and your lawyer.  The first step in the process is filing an arbitration case against your former firm with the Dispute Resolution department at FINRA.  This is because FINRA can only expunge information from the CRD system, and only if it is directed do so to by an order issued by an arbitration Panel or a court, as explained below.

When can you get an arbitration panel to order FINRA to expunge or amend your Form U5?  The grounds are limited.  You and your attorney will need to prove that the U5 is defamatory, misleading, inaccurate or erroneous.  Even if not bringing a separate defamation claim, it is to your advantage 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, you can avoid the additional step of having to go to court to have the Award confirmed and converted into a civil judgment.

If at the conclusion of your arbitration you are unable to get the Panel to order your U5 be expunged on the grounds it is defamatory, but you do obtain relief on another basis – such as the filing is misleading or inaccurate – you will then have to file a separate lawsuit in a civil court in your area 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 will modify your record on the CRD to incorporate the specific changes you have been able to convince the court to direct – whether as to the termination reason, the termination comment text, or both.

Conclusion

Getting changes made to your Form U5 after termination is a complicated process, and the costs must be weighed against the benefits.  But if you feel your former firm has added injury to insult by falsely representing the reasons for your termination, and has substantially damaged your relationship with your clients and your reputation, bringing a case against the firm with FINRA may be your only choice.  However, the best strategy is to be proactive immediately if you have been terminated.  Have experienced FINRA legal counsel to try to negotiate the best U5 language possible with your former firm before it is posted to the CRD.  If you are not successful, determine whether submitting a Broker Comment form with your side of the story is sufficient.  If these two steps are not successful in stemming the damage, carefully consider whether the potential benefits to your practice of bringing an arbitration case against your old firm in order to repair your reputation outweigh the legal costs involved in the process.

Scott Matasar, a partner at Cleveland, Ohio-based Calfee, Halter, & Griswold LLP, regularly counsels brokers on the regulations and other legal issues surrounding a change of employment.  He also represents both corporate clients and individuals in all forms of securities litigation and regulatory matters, including customer arbitrations and enforcement/disciplinary proceedings brought by the SEC, FINRA and/or state securities regulators.  To learn more about Scott, please visit http://www.calfee.com/Scott_C__Matasar.bio


[1] If you have already joined a new firm, the mechanism for filing a rebuttal is by filing an amended Form U4 with the CRD.

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