Outside-IN

Thorough internal investigations of sexual harassment claims are critical for advisory firms in the wake of #MeToo

Firms filing a Form U-5 with Finra must balance their regulatory duty to disclose wrongdoing with the need to mitigate potential liability for defamation

Jan 8, 2019 @ 4:10 pm

By Alice Kokodis

Financial institutions conducting sexual harassment investigations in the wake of the #MeToo movement need to proceed cautiously. As Wall Street has come under scrutiny on how it handles complaints of sexual misconduct, compliance and human resources departments must take a more vigilant and measured approach to performing sensitive internal investigations. This prudence is especially important for firms that employ registered representatives and must balance their regulatory duty to disclose wrongdoing to the investing public and the transparency sought by the movement, with the competing need to mitigate potential liability for defamation or other claims.

While firms historically tended to protect their own, the current social climate has fostered a more conservative approach, in which employers may be more inclined to err on the side of separating an employee accused of sexual harassment. If the terminated employee is a registered broker or financial adviser, the firm is required to file a Uniform Termination Notice for Securities Industry Registration, or Form U-5, with the Financial Industry Regulatory Authority Inc.

(More: Sen. Warren seeks data showing extent of sexual harassment on Wall Street)

The Form U-5 is heavily relied upon within the financial industry for various purposes, since it is more than just a document notifying the termination from a member firm. Regulators, such as the Securities and Exchange Commission, use it to identify individuals violating industry rules, state statutes or federal regulations. Regulatory and licensing authorities consider the reason for the termination when renewing the employee's registration or licensing abilities. In addition, the Form U-5 is referenced when member firms hire new representatives, as investors may use the information when they are considering whether to engage the company.

The majority of the terminations on the Form U-5 are described as (1) voluntary, meaning the representative left the firm of his or her own accord; (2) involuntary/terminated, meaning the firm terminated the representative, often following allegations of misconduct; or (3) "permitted to resign," where a representative is allowed to resign prior to an involuntary termination.

This third option usually applies when an internal investigation is pending, but the employer hasn't yet rendered a decision on the alleged misconduct. When a representative is terminated from a firm, or permitted to resign after allegations of misconduct have been made, firms are also required to describe on the Form U-5 the circumstances leading to the employee's termination or resignation.

Issues often arise on how the termination is described and, in the case of a sexual harassment investigation where the allegations are not fully substantiated, what, if anything, about the alleged misconduct is included on the Form U-5. Since false or misleading information on the Form U-5 can have devastating effects on the employee's future career in the securities industry, accuracy on the termination reason is paramount. Moreover, inaccurate statements or unsupported conclusions may expose the firm to potential defamation actions, which are now the fourth most popular type of intra-industry claim, behind breach of contract, promissory notes and compensation.

(More: Morgan Stanley case shows how firms smear departing brokers)

To reduce the potential for litigation, firms should consider who should take the lead in sexual harassment investigations. Appropriate investigators may include someone in human resources, an in-house attorney, an outside investigator or a committee created by the firm for such investigations. The firm should select individuals who are competent and trained in investigatory techniques, knowledgeable about company policies and procedures, and capable of bringing fairness and objectivity to the process, and who will not be swayed by media trends.

The firm should also have procedures on how to draft and approve Form U-5 filings that must be implemented as early as possible in the decision to terminate a U-5-eligible employee. While some firms rely on their compliance departments to prepare the Form U-5, the final termination language should be reviewed by the investigator prior to filing to ensure consistency with the findings and to confirm that all supporting documents, with relevant witness statements and other proofs, are ready should litigation ensue. Diligent confirmation of the U-5 disclosures may help demonstrate that a potentially defamatory statement was not knowingly or recklessly false.

Most Form U-5 defamation claims are subject to Finra arbitration and its Code of Arbitration Procedure for Industry Disputes, and demonstrating a good-faith investigation can go far in an arbitration setting, where standards are often less rigorous and the panel is focused instead on who is in the wrong. By understanding this landscape and implementing certain measures to ensure a thorough and bias-free investigation, a broker-dealer or investment advisory firm can reduce its exposure to costly defamation claims arising from Form U-5 filings while complying with its regulatory obligations and its commitment to creating an inclusive work culture.

(More: Advice firms have little tolerance for sexual harassment, but most lack formal policies)

Alice Kokodis, an attorney in the Boston office of Littler, represents employers in a broad range of employment law matters.

0
Comments

What do you think?

View comments

Upcoming event

Sep 10

Conference

Denver Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Most watched

INTV

Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.

INTV

Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.

Latest news & opinion

New Jersey fiduciary rule: Pressure leads to public hearing, comment deadline extension

Industry push results in chance to air grievances on July 17 and another month to present objections.

InvestmentNews' 2019 class of 40 Under 40

Our 40 Under 40 project, now in its sixth year, highlights young talent in the financial advice industry. These individuals illustrate the tremendous potential of those coming up in the profession. These stories will surprise, entertain, educate and inspire.

Galvin to propose fiduciary rule for Massachusetts brokers

The secretary of the commonwealth is proposing a fiduciary standard in response to an SEC investment-advice rule he views as too weak.

Summer reading recommendations from financial advisers

Here are some books that will keep you informed and entertained during summer's downtime

4 strategies for Roth conversions

There's never been a better time to do a Roth conversion, and here are several ways to go about it.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print