What financial advisers can do about a U5 disclosure

Given the current regulatory environment and increasing utilization of BrokerCheck by the public, a broker must take ownership of his or her CRD

Jan 25, 2017 @ 11:05 am

By Doc Kennedy

Did your former broker-dealer file a Form U5 that makes you look bad? Have you been told that nothing can be done about it? Before accepting defeat, you owe it to yourself to hear this story.

“Bob” resigned or was terminated and the firm filed a U5 with allegation information some months later. The U5 resulted in a mark on Bob's CRD and U4 and a new disclosure on his BrokerCheck profile: “Employment separation after allegations.” Does this guy just have bad luck? Perhaps he did something unethical that was only later discovered by the reporting B-D. Maybe the B-D simply filed the U5 to set an example or disparage Bob in hopes of retaining some of his accounts.

The true story means little to investors and potential employers. Regardless of whether Bob was the victim or the perpetrator, those viewing his CRD or BrokerCheck will assume that Bob somehow falls short of a similar broker without the disclosure on his or her record.

Tainted by the U5, Bob not only faces difficulties finding a new employer, but also discovers that the Financial Industry Regulatory Authority Inc. is particularly interested in him now that he is part of the 15% or so of licensed brokers with one or more disclosures on their CRD. To make matters worse, Bob discovers that bringing on new business seems more difficult than it was before, and every dollar he pours into marketing his business is directing more potential clients to his BrokerCheck profile.

Due to Finra promoting BrokerCheck and the amendments to Rule 2210 passed on June 6, 2016, investors are now researching Bob before he is even aware that they are considering investing with him. BrokerCheck is no longer a vehicle informing investors and employers of his favorable record as a broker. Instead, those viewing Bob's BrokerCheck profile are seeing the allegations published by his former B-D.

But there is hope for Bob. Through Finra arbitration against the B-D that published the U5, he can have the U5 completely expunged from the CRD system (including his U4 and BrokerCheck), and he may obtain monetary damages to offset the economic impact the U5 has had upon him.

Bob may choose to seek expungement of a U5 through either Finra arbitration or civil court. However, choosing any forum other than Finra's arbitration will position Bob against both the publishing B-D and Finra itself. Because it provides its own mechanism through which an expungement may be obtained, Finra does not play nice when a broker attempts to bypass Finra arbitration in pursuit of an expungement through civil court.

We may assume that spending a fortune fighting both Finra and his former employer is not on Bob's bucket list. So the best option is to utilize Finra's arbitration in order to gain an expungement award and have the option of recovering monetary damages. If the U5 allegations contain false, misleading or disparaging information, the basis of Bob's claim will be defamation. Bob's claim could also include additional components such as discrimination, tortious interference, fraud or negligence.

In the interest of efficiency, Bob chose to utilize Finra's arbitration. His attorney calculated and claimed damages related to the U5 of $500,000. The publishing B-D offered to settle the monetary portion for $200,000, which Bob accepted. In the subsequent arbitration hearing, the panel determined that the U5 was misleading and disparaging. As such, the panel awarded the expungement. Since then, Bob's professional integrity has been restored. He now benefits from BrokerCheck's popularity and has found new opportunities much more common.

The takeaway from all of this is that a U5 published to the CRD is not a permanent scar on your record. Given the current regulatory environment and increasing utilization of BrokerCheck by the public, a broker must take ownership of his or her CRD. Those that make the effort to keep their CRD clean and free of negative marks will reap the benefits of the millions of dollars being spent promoting BrokerCheck. Those that fail to do so will experience swelling impairments to their business and reputation.

Doc Kennedy is the president and managing attorney of AdvisorLaw, a firm representing Finra-licensed professionals.


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