U-4/5 Defamation Claims

Have you just been “terminated” from employment with your broker-dealer? If so, your former broker-dealer is required to file a Uniform Termination Notice for Securities Industry Registration, commonly known as Form U-5, with FINRA.

Your former employer, investment advisor, or issuer of securities must file the Form U-5 with the Central Registration Depository (CRD) no later than 30 days after the date of your termination. They are required to send you a copy as well.

It is important to remember that you remain subject to FINRA jurisdiction for 2 years after the date of your termination even if you leave the industry. For this reason, it is important that you notify FINRA of any change in your address during this 2-year period, otherwise you may not receive important communications from FINRA or your former employer regarding your Form U-5 or subsequent amendments.

Per FINRA’s definitions, your employment is “terminated” regardless of whether or not you voluntarily resign, are laid-off or fired. As a result, it is critically important for you to know what your former employer plans to indicate on your Form U-5 as the “reason” for your termination. Form U-5 provides several check boxes from which your former employer must select one reason.

The reasons for termination from which your former employer must choose are: Discharged, Other, Permitted to Resign, Deceased or Voluntary. These choices are sparse and very limited, providing or little explanation. Furthermore, if either Discharged, Other or Permitted to Resign are selected, your former employer is required to provide an explanation within a limited space, which is provided on the form U-5.

• That explanation must be accurate, candid and forthright for two very important reasons:
  • First, filing an inaccurate, false or misleading Form U-5 is grounds for sanctions action against your former employer
  • Second, filing such false information would constitute defamation against you.

It is also important to remember that your employer has a continuing obligation to amend and update a previously filed Form U-5; this includes reporting matters that became common knowledge only after the initial filing. For example, your former employer may become aware that you engaged in unauthorized trading after you resigned and a “voluntary” Form U-5 was filed. At that point, your former employer must file an amended Form U-5, amended Disclosure Questions, and amended DRP pages for all “yes” disclosures.

By the same token, if you were discharged for unauthorized trading and the firm’s investigation later concludes you did not engage in unauthorized trading, your firm must file an amended Form U-5 to report the results of its investigation. Regardless of the termination “reason” selected by your former employer, every termination, including those marked “voluntary,” require your former employer to answer numerous “Disclosure Questions” and file a “Disclosure Reporting Page” (DRP) for each question answered “yes.”

For example, if prior to your voluntary resignation, one of your clients filed a lawsuit or Statement of Claim alleging a sales-practice violation in which you are not individually named as a defendant/Respondent, but nevertheless your name is mentioned in the body of the lawsuit or Statement of Claim, your firm must answer “yes” to Disclose Question 7E and complete a DRP as part of your Form U-5 filing. The same is true even if your name is not mentioned in the body of the lawsuit or Statement of Claim but your firm determines that you are the subject of the customer’s allegations.

Finally, a major area of concern is reporting internal firm investigations. For example, if you were under internal review by your firm at the time of your resignation (whether you were aware of the investigation or not) for alleged violation of “rules or industry standards of conduct,” your former firm must answer “yes” to Disclosure Question 7B and submit a DRP disclosure regarding the internal investigation. You may be completely unaware that you were under internal review at the time you resigned and only find out upon receipt of your copy of Form U-5, or even worse, when you are refused subsequent employment with a new employer.

Unfortunately, what “rules or industry standards of conduct” trigger this disclosure are subject to interpretation or abuse. For example, your former firm could cite a unique internal policies or procedures as the “rules or industry standards” you violated, when in fact it is not an industry-wide standard at all. For all these reasons, you should retain the services of an experienced FINRA employment arbitration attorney prior to resigning from employment or the same day you are involuntarily terminated from employment. As stated earlier, your former firm has no more than 30 days to file your Form U-5. It is during this short period that your attorney can contact the person responsible for filing your Form U-5 and discuss its contents before it is filed.

Once your Form U-5 is filed, the only way it can be changed is by (a) starting a FINRA arbitration proceeding seeking to expunge the inaccurate, false or misleading disclosures then (b) winning in arbitration and obtaining a favorable award requiring FINRA to change the information reported on your Form U-5 and CRD. Obviously, this is costly and time-consuming with uncertain results. More importantly, during this process you may be denied new employment in the securities industry based upon disclosures on your Form U-5 and CRD leading you into a personal financial crisis.

Contact us at Lubiner, Schmidt & Palumbo to discuss your options. We can guide you through this confusing and complicated process. Our 30 years of experience can greatly increase your odds of a favorable outcome!