The Form U-5: a Potential Headache for Member Firms and Associated Persons
Switching employment in the securities industry (voluntarily or otherwise) is hardly seamless. Issues abound. We are often asked, for example, whether a departing employee can keep his or her book of business, whether a non-compete clause is enforceable, or how to notify the appropriate agencies. Another issue—and the subject of this article—is the Form U-5, which is a boilerplate form through which member firms must notify the Financial Industry Regulatory Authority about the circumstances surrounding an employee’s departure. This form, if done incorrectly, can have devastating consequences—for both the member firm and the former employee. Read on to find out more.
What is the Form U-5?
The Financial Industry Regulatory Authority (FINRA) requires member firms to file a Form U-5 (otherwise known as the Uniform Termination Notice for Securities Industry Regulation) within 30 days of an associated persons’ termination of employment. The Form U-5 obligates member firms to disclose to FINRA many things, including:
- The reason for termination;
- Whether the associated person is, or at termination was, under investigation;
- Whether the associated person is, or at termination was, under internal review;
- Whether the associated person has been the subject of a customer complaint.
How much detail is required?
Substantial. FINRA Regulatory Notice 10-39 provides that member firms must “provide sufficient detail” when completing a Form U-5 “such that a reasonable person may understand the circumstances” of the termination. It explains that if, for example, an associated person was terminated for violating internal policies, the member firm must “identify the policy [and] provide sufficient facts and circumstances to enable the reader to understand what conduct was involved . . ..” Member firms also have a continuing duty to update the Form U-5 if and when additional facts are discovered.
Are Form U-5 disclosures publicly available?
Partially. While the form itself is not publicly available, facts and circumstances disclosed through it may be recorded on FINRA’s Central Registration Depository, which members of the public, state regulators, and future employers can access. Members of the public can access FINRA Broker Check which contains information which might appear on the Form U-5.
What if the Form U-5 contains inaccurate or misleading information?
Aggrieved persons have one option: initiate an expungement proceeding through FINRA Dispute Resolution against the member firm. These proceedings give aggrieved parties an opportunity to formally challenge disclosures on the Form U-5 and, as is becoming a more common phenomenon, seek monetary damages under state law for defamation, wrongful termination, and/or unfair trade practices.
What is involved in an expungement proceeding?
Expungement proceedings, if contested, can pose substantial burdens on member firms and associated persons. Putting aside the financial squeeze caused by prolonged and specialized litigation, these proceedings often demand extensive time-commitment from parties which can be both distracting and mentally taxing. If an associated person is successful at the expungement proceeding, FINRA will, subject to other requirements being satisfied, and replacement language being proposed, strike inaccurate or misleading information from the Form U-5. What is more, the member firm can be on the hook for damages, that, if large enough, can force a broker-dealer to break net-capital and go out of business.
Can an associated person negotiate the language on the Form U-5?
The responsibility for completing the Form U-5 rests with the member firm; however, the associated person or his/her counsel may agree on language with the member firm which might eliminate the need for an expungement action while communicating the truth about the termination. Parties should not forego the opportunity to agree on the language for the descriptions on the Form U-5 before embarking on the long and arduous road of litigation.
What are the main takeaways about the Form U-5?
Against this backdrop, member firms must exercise extraordinary caution, foresight, and prudence before and even after filing a Form U5; and, conversely, associated persons must ensure that the Form U-5 does not contain imprecise or misleading facts. To that end, whether a member firm or associated person, it is important to consult with counsel if you have any questions about an existing or anticipated Form U-5. The experienced and knowledgeable attorneys in our Securities Practice Group are well-placed to answer these questions.
What securities-related services does Cohen and Wolf provide?
Cohen and Wolf’s Securities Group represents a diverse base of clients in the areas of securities regulation, compliance, offerings, filings, and litigation. The Group has extensive experience in representing investment bankers, hedge funds, broker-dealers, investment advisers, broker-dealer agents, investment adviser representatives, investment adviser agents, and issuers of securities before federal, state, and self-regulatory securities agencies.