“The U5 is probably the only publicly disclosed document that lists just a complaint. A customer only has to think that you’re churning an account and make a complaint. It doesn’t have to be true,” said Barry Lax, a founding partner at New York’s Lax & Neville, adding that most brokers live in fear of this scenario. “When you become an advisor, this is one of the first things you learn. You hear about this thing, the CRD [Central Registration Depository], and the U5, and how any mark on your license will ruin your career.”
If it’s terrifying for good brokers to contemplate erroneous client allegations, imagine what it feels like if the same allegations come from brokers’ colleagues, people they worked with, sometimes for years.
“To be honest, if a firm wants to go back through a career and find some tiny little violation, one little thing that’s not quite right, it probably can be found,” Papike said. “Maybe the firm was willing to overlook it then, but now that you’re leaving there can be tremendous motivation, especially if they want to try to keep your book of business. So if a manager starts digging, they can probably find something.”
Sharron Ash, chief litigation counsel at Englewood, N.J.-based Hamburger Law Firm, said firms will find a way to inflict pain on brokers if they want to badly enough (if they want to find a scapegoat for a compliance issue, for example, or if they are fervent about keeping a client’s book of business), and if the firms are that motivated, they will likely find some type of infraction that supports their efforts.
“It’s a competitive strategy. It’s weaponizing the U5 on the way out the door,” Ash said. “It shouldn’t be so easy to get a mark on your record, and so hard to get it off.”
The Odds Of Winning A U5 Dispute Are Meager
Since July 26, 2007, the Financial Industry Regulatory Authority (Finra), has been the self-regulatory organization for the securities industry. In addition to overseeing the licensing and registration of broker-dealer firms and their employees (and certain compliance officers and administrators) it also handles disputes.
Most employment contracts between Finra member firms and their brokers stipulate that arbitration in front of a Finra panel is the only way to resolve those disputes, and that includes tussles over the language of the U5. The arbitrators employed by Finra do not have to be financial or legal professionals, though sometimes they are. All are trained through a “Basic Arbitrator Training Program,” according to Finra’s website. The first part of the program covers the procedures in each stage of the arbitration process spread across 15 modules. It’s expected to take six hours to complete, start to finish. Success is completing a 25-question, multiple-choice exam with a passing score of 80%. The final training module is on expungement alone, and it takes another hour and requires a second assessment. This exam consists of 10 true/false questions, with the same 80% passing grade.
The decision of these arbitrators, who make $600 to $850 per day, is final and binding. There’s no next step.
“When you end up in front of Finra arbitrators, it’s a bit of a crap shoot,” said one lawyer for Alliance Bernstein who asked not to be identified. “You can take the same case to three different panels and get three different awards.”
As the broker-dealer universe has grown over time, so has the number of cases where brokers challenge their U5 and enter arbitration in the hope of having it corrected or expunged. In 2015, for example, Finra’s public search function showed 101 cases in which contested U5 forms went to arbitration on the grounds that they were incorrect and defamatory. In 2021, that number had doubled to 206.