Form U-5 (Uniform Termination Notice for Securities Industry Registration) is a form that, within 30 days, brokerage firms must complete and file with securities regulators to report the termination of a broker’s employment. On Form U-5, the brokerage firm must report the reason for the broker’s termination and whether the broker voluntarily left, was permitted to resign, or was fired.
Also, on a broker’s Form U-5, the brokerage firm must disclose (i) whether any governmental agency or self-regulatory organization (an “SRO”) is or was investigating or has brought any disciplinary action involving the broker and (ii) whether the brokerage firm is or was internally investigating the broker for, or whether the firm fired the broker after someone accused the broker of, violating securities laws or rules.
So, the brokerage firm must disclose (iii) whether, while working for the firm, the broker was charged with or convicted of certain crimes and (iv) whether, while the broker was working for the firm, anyone brought customer complaints, arbitration claims, or filed civil lawsuits against the broker.
If the brokerage firm’s answer to any of these Disclosure Questions is “yes,” then, on the appropriate Disclosure Reporting Page (“DRP”) included in the broker’s Form U-5, the firm must give complete details of the events or proceedings.
The information on a broker’s Form U-5 is recorded in each broker’s Central Registration Depository (“CRD”) file and is made available to other broker-dealers to decide whether to hire the broker. The CRD system is an online registration and licensing system that contains information used by the U.S. Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority, Inc. (“FINRA”), other self-regulatory organizations (“SROs”), and state securities regulators to make licensing and registration decisions, among other things.
FINRA’s BrokerCheck website (“BrokerCheck”) obtains its information from the CRD system. Through BrokerCheck, investors and the public may easily access much of the information on a broker’s Form U-5, such as the reason a brokerage firm terminated the broker’s employment and the above-described Investigation, Internal Review, Criminal, Regulatory Action, Customer Complaint/Arbitration/Civil Litigation, and Termination Disclosures.
If a brokerage firm is seeking to retaliate against a broker, the firm may include defamatory information on Form U-5 that damages the broker’s good name and severely harms the broker’s ability to find new employment.
Further, there is a growing trend in which brokerage firms use Form U-5s as an anti-competitive tool. Financial services firms increasingly disparage brokers on Uniform Termination Notices to dissuade customers from following the brokers to new firms.
Initially, it is critical that, immediately upon being fired by their brokerage firm, a broker retains a Manhattan City Form U-5 Negotiation Attorney to negotiate the information that the former employer will include on the broker’s Form U-5. This negotiable information includes (i) the reason for the broker’s termination, (ii) whether the broker voluntarily left, was permitted to resign, or was fired, and (iii) the above-described Investigation, Internal Review, Criminal, Regulatory Action, Customer Complaint/Arbitration/Civil Litigation, and Termination Disclosures.
For example, a terminated broker, through counsel, may ask the brokerage firm to state on the broker’s Form U-5. They may also provide facts justifying a statement by the firm that the reason for the broker’s firing (or for the firm permitting the broker to quit) was vague and relatively benign. Reasons could be loss of confidence by the brokerage firm in the broker or a disagreement between the firm and the broker that was resolved satisfactorily post-termination.
A discharged broker may ask the financial services firm to specify on the broker’s Uniform Termination Notice. They may also supply facts warranting specification by the firm that the actions by the broker that resulted in his discharge or his negotiated departure were not securities-related, investment-related, customer-related, or sales practice-related.
There is leeway for such negotiation of the language of a broker’s Form U-5. This is the case because FINRA requires only that a brokerage firm, in responding to Form U-5 questions, “provide sufficient detail . . . such that a reasonable person may understand the circumstances that triggered the affirmative response.” See FINRA Regulatory Notice 10-39, at 2 (Sept. 2010).
On behalf of brokers, the Law Offices of David S. Rich, LLC skillfully negotiates, with brokerage firms, the information to be included on the Form U-5s, which the firms will file with securities regulators to report the termination of the brokers’ employment. Suppose you are a recently terminated employee in the securities industry and believe that your former employer may make negative statements on your Form U-5. Contact the Law Offices of David S. Rich, LLC if this is you.
Fortunately, when pre-filing negotiations do not succeed, there is a process by which a broker may be able to expunge (that is, to excise or remove) negative statements made by their former brokerage firm on the broker’s Form U-5.
Specifically, a broker may bring a FINRA arbitration seeking expungement against his former employer from the CRD, from the broker’s Form U-5 filed by the broker’s ex-employer upon the broker’s termination, and from any Form U-5 or Uniform Application for Securities Industry Registration (“Form U-4”) filed or amended after the broker’s termination, specified employment-related information concerning the broker, based on the defamatory nature of the information supplied by the ex-employer.
Expungement Of Employment-Related Information From The Central Registration Depository. In an intra-industry dispute, FINRA will expunge information from the Central Registration Depository without a court order if the arbitration panel awards expungement relief based on the defamatory nature of the information contained in the CRD system and explicitly states in the award that it is recommending expungement on that basis.
Suppose the arbitration panel does not state that it is awarding expungement relief based on the defamatory nature of the information. In that case, FINRA will expunge the information contained in the CRD only if the arbitration award granting expungement relief is confirmed by a court of competent jurisdiction.
Defamation. Because, as noted above, FINRA arbitration panels have the authority to order the expungement of information in the CRD system, which is defamatory in nature, a broker in Manhattan, in a FINRA arbitration seeking expungement, should specifically identify the negative statements made by the broker’s ex-employer in the broker’s Form U-5 and should prove that those statements are defamatory. In this regard, the following principles of Manhattan law are helpful.
“Libel is a method of defamation expressed in writing or print.” Lino Celle v. Filipino Reporter Enters. Inc., 209 F.3d 163, 176 (2nd Cir. 2000).
In Manhattan, the elements of the cause of action for libel are: ” ‘(1) a written defamatory statement of fact regarding the plaintiff; (2) published to a third party by the defendant; (3) defendant’s fault, varying in degree depending on whether the plaintiff is a private or a public party; (4) falsity of the defamatory statement; and (5) injury to the plaintiff.’ ” DiBella v. Hopkins, 403 F.3d 102, 110 (2d Cir. 2004).
As to the defendant’s fault, a private person who sues for defamation concerning a matter of private concern “merely needs to prove that the defendant acted negligently in making the statement.” Boule v. Hutton, 138 F. Supp. 2d 491, 506 (S.D.N.Y. 2001).
Injury is assumed when a plaintiff is disparaged in a professional or business capacity. See DiBella, 403 F.3d at 110 (stating that disparagement of the plaintiff in his professional capacity is libel per se and injury is assumed).
A statement is defamatory if it “tends to expose a person to public contempt, hatred, ridicule, aversion or disgrace” Thomas H. v. Paul B., 18 N.Y.3d 580, 584, 965 N.E.2d 939, 942 N.Y.S.2d 437, 440, 965 N.E.2d 939, 942 (N.Y. 2012), ” ‘or to induce an evil or unsavory opinion of the plaintiff in the minds of a substantial number of the community,’ ” Cuevas v. Harvard Univ., 269 A.D.2d 328, 703 N.Y.S.2d 916, 917 (1st Dep’t 2000).
To evaluate a statement’s content to determine if the statement has a defamatory meaning, a court must consider what “the ordinary and average reader would likely understand the use of these words . . . as meaning.” Rinaldi v. Holt, Rinehart & Winston, Inc., 42 N.Y.2d 369, 366 N.E.2d 1299, 397 N.Y.S.2d 943, 951 (N.Y. 1977).
In cases of specialized audiences, such as the readers of Form U-5s, the statement’s defamatory meaning is to be judged by the average and ordinary reader of the particular publication. See, e.g., Gjonlekaj v. Sot, 308 A.D.2d 471, 472-474, 764 N.Y.S.2d 278 (2d Dep’t 2003).
Time Limits. FINRA Rule 13206(a) states, in pertinent part, “No claim shall be eligible for submission to FINRA arbitration . . . where six years have elapsed from the occurrence or event giving rise to the claim.” Therefore, a broker has six years from his former employer’s filing of a Form U-5 to bring, against his ex-employer, a FINRA arbitration seeking expungement of that Form U-5.
The Law Offices of David S. Rich, LLC aggressively arbitrates, on behalf of brokers, FINRA proceedings seeking to expunge negative statements made on the brokers’ Form U-5s. If you are a securities industry professional with negative information on your Form U-5, which you need to be expunged, contact the Law Offices of David S. Rich, LLC.
David S. Rich is the founding member of the Law Offices of David S. Rich, LLC,
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