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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 "BrokerCheck" 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 inquiry, sanctioned, fined or find itself on the wrong end of a U-5 defamation suit filed by 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. Even if the representative is not named in the written complaint, your firm must 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). 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, employees are more likely than ever to file a defamation claim against their former firms if they are harmed by an inaccurate U-5 filing. For these reasons, your firm should retain the services of experienced securities employment attorneys at Lubiner, Schmidt & Palumbo to discuss anticipated Form U-5 filings and minimize or eliminate the risk of a defamation claim made by a former employee.

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