“Yes answers” can have a significant impact for financial advisers who are looking to change firms and for those whose clients or potential clients perform background checks online.
Although we all know that customer complaints and terminations can have a negative impact, many advisers are unaware that they may not be able to control certain types of yes answers and that these marks can affect their records indefinitely.
A yes answer refers to the questions on the Uniform Registration Forms used to file information with the Central Registration Depository, accessible by the public through the Financial Industry Regulatory Authority Inc.'s BrokerCheck database. Specifically, Form U4 (Uniform Application for Securities Industry Registration or Transfer) and Form U5 (Uniform Termination Notice for Securities Industry Registration) are used by broker-dealers to register and terminate the registrations of advisers with regulatory organizations.
Questions requiring yes or no answers cover topics ranging from regulatory violations, fraud and complaints.
There are at least three types of yes answers over which advisers have little control:
Denied customer complaints. Although denied customer complaints may seem insignificant, accusations typically are accompanied by harsh words that remain on the CRD for at least two years. Clients who read the claims on BrokerCheck may be scared away, regardless of their resolution. If an adviser's record shows patterns of denied complaints, firms also may be hesitant to affiliate with that adviser.
Complaints settled to minimize expense and time. Many advisers think that because it may save money and time, settling a client complaint is the best option. The decision to settle or fight a claim isn't always the adviser's to make. Although an adviser may not have done anything wrong, if his or her broker-dealer decides that a claim isn't worth the cost or time to fight and therefore settles, the adviser may be left with it on his or her permanent record. Settled cases may also give the perception of guilt.
Termination explanations. Broker-dealers may terminate advisers for any reason. Explanations documented on a rep's record can be damaging, staying on the record permanently. Often there are discrepancies and/or the B-D may misrepresent the cause of a rep's departure.
So how can advisers protect themselves against damaging yes answers?
Comment on CRD marks. When complaints or marks appear on a CRD record, advisers have the opportunity to provide their own explanation, which can add some color to gray areas. Remember, there are two sides to every story, and it is important to tell yours.
Encourage your broker-dealer to fight complaints. Although it may seem in your best interest to settle claims, this decision may not be the best solution for you in the long term. If you are at an independent broker-dealer and have some say in whether a case against you is fought or settled, it may be in your best interests to persuade your broker-dealer or carrier of errors-and-omissions insurance to fight it. In most situations, wirehouse advisers will have little choice in the decision.
Monitor disclosures to improve your record. Advisers may request that yes answers citing denied complaints or complaints that involve settlements of less than $15,000 be taken off their record or moved to a “denied or withdrawn” category after two years. This doesn't happen automatically, and advisers need to be proactive in approaching Finra or their B-D once the two years have passed.
Hire an experienced securities attorney. If you have a claim against you or are terminated from your firm, it may be in your best interest to hire an experienced securities attorney who will know what is best for you in the long term. Although it may cost you financially, the payoff typically outweighs the cost.
For advisers stuck in limbo or in between firms while disputes are pending, hiring an experienced securities attorney can be invaluable to ensuring that everything possible is done to clear the record and expedite the process. A securities attorney can help you navigate highly complicated state and Finra regulations.
It is important for advisers to be aware of the long-term effects of marks on their CRD and to know how to protect themselves should they become involved in a situation that isn't a result of their own wrongdoing.
Jodie Papike is executive vice president of Cross-Search, the first third-party independent-broker-dealer-adviser and executive placement firm.