Employer U-5 Defamation
You have just terminated the employment of a registered-representative from your broker-dealer. Within 30 days of that termination, your firm must file a FINRA Form U-5. On page two of Form U-5, your firm must select a reason for the termination from the following choices: Discharged, Other, Permitted to Resign, Deceased or Voluntary. If the reason for termination is Permitted to Resign, Discharged or Other, your firm must provide an explanation for the termination. Depending on the facts and circumstances surrounding the termination, your firm may also need to file a Disclosure Reporting Page (DRP). Specifically your firm must supply a DRP if any "yes" response is provided to Question 7 of the Form U-5. Since the information your firm provides on the Form U-5 and/or DRP will become part of the registered-representative's Central Registration Depository (CRD) record that is viewable by any FINRA¬member firm as well as the public through FINRA's widely advertised "Broker Check" website, it is important that the information your firm provides is truthful and accurate. If not, your firm could be subject to a FINRA regulatory or disciplinary inquiry, sanctioned, fined or find itself on the wrong end of a U-5 defamation suit from your former employee. It is also important to remember that your firm has a continuing obligation to amend and update a previously filed Form U-5, including reporting matters that become known after the initial filing. For example if, after an internal investigation, it is discovered that a former registered-representative who was discharged for alleged unauthorized trading did not actually engage in unauthorized trading; your firm is required to file an amended Form U-5, Disclosure Questions and any DRP pages to accurately report the final results of your investigation. Similarly, after a voluntary resignation by one of your registered-representatives, a customer files a written complaint alleging a sales-practice violation in an account managed by that former representative (but the representative is not named in the written complaint) your firm must nevertheless file an amended Form U-5 answering "yes" to Disclose Question 7E and submitting a DRP as part of the amended Form U¬5 filing. A major area of exposure for a broker-dealer is how to handle the reporting of an internal firm investigation for possible violations of "rules or industry standards of conduct" that is ongoing at the time a representative resigns (whether or not the rep is aware of the investigation). To be truthful, your firm must answer "yes" to Disclosure Question 7B and submit a DRP disclosure regarding the internal investigation even though the former representative was unaware of the ongoing internal investigation at the time of resignation. Needless to say, former employees are more likely than ever to file a U-5 defamation claim against your firm if they are harmed through a decrease in business, inability to obtain employment or sanctions imposed by FINRA if your firm's reporting is deemed to be inaccurate or subject to a different interpretation. For all these reasons, your firm should retain the services of experienced FINRA employment attorneys at Lubiner, Schmidt & Palumbo to discuss anticipated Form U-5 filings. Since your firm has 30 days to file a Form U-5, it behooves your firm to seek an appropriate consultation lest the firm be confronted with the costly defense of a U-5 defamation claim.