This is the first in a three-part series on broker-dealer U5 Forms.

When a brokerage firm wants to intimidate a broker, nothing works better than the Form U5 termination notice through which firms disclose the reasons for brokers’ departures. To the broker, the threat of U5 disclosure is a set of brass knuckles glinting in a dark alley, the slap of a tire iron against a meaty palm.

Its use in this fashion, industry sources said, speaks to an ultimate imbalance of power between employer and employee, one that is exercised after an employee has left and, once filed, is very difficult if not impossible to remedy. Many view this looming threat as one of many inducements driving more brokers to drop their securities license altogether and migrate to the RIA world, where such practices are less frequently used by employers.

“Advisors are terrified by what can happen. Having something negative recorded on a U5 is a momentous thing,” said attorney Laurence Landsman, a founder at Chicago’s Landsman Saldinger Carroll, a law firm specializing in representing brokers and advisors in all areas of career transition. “Every week I’m contacted by someone who’s been terminated. There’s so much movement in this industry, registered reps need to understand what their rights are. And they do have rights. They have protections. But it’s easy to get steamrolled by the firms, and the results can be heartbreaking.”

If a broker or dually registered hybrid RIA thinks they are about to be fired, their next move is the most important one they’ll ever make. Even if they are just considering a jump from one firm to another or contemplating hanging their own shingle, the next move may be critical to their ability to work in the industry.

“If anything starts feeling off, or something isn’t quite right with the firm, or you know you’re heading toward leaving, get an attorney,” counseled Jodie Papike, president of Cross-Search in Encinitas, Calif., a financial services recruiter that helps brokers get to their next spot. “You can’t wait until the U5 is filed. It is so rare to be able to get that to change. It takes so much time, and money, to push back.”

According to the sources interviewed for this three-part series on the Form U5 and its impact on the financial services industry, termination—what other industries simply call separation from employment—produces a dynamic ripe for potential abuse, where a broker with a clean track record simply leaving to join a different firm can get similar treatment to a bad actor diverting client funds for personal use.

A broker-dealer has up to 30 days from a broker’s departure to file the Form U5, which will lay out the firm’s explanation of the breakup. If the circumstances involve a client, the firm’s version gets logged immediately on BrokerCheck, a popular directory of broker records used by customers and potential employers alike. The BrokerCheck posting happens even if the broker has a vastly different version of the events and has filed for arbitration.

“Getting fired in the finance industry is not like getting fired in any other industry. If a company sells straws, and you’re a salesperson and you get terminated, no one will know about it. You can go to another straw company,” Landsman said. “In fact, even if someone were to call your prior employer, they couldn’t get into why you left.”

The reason, of course, is that brokers deal with money—specifically other people’s money—and BrokerCheck is ultimately (and rightly) designed to protect investors. But industry sources say there’s a gray area that stretches between the Boy Scout without a blemish and the Bad Actor who deserves jail time, and too many brokers find themselves stuck there, people who should not have to spend up to two years of their careers and as much as six figures to fight what can amount to nothing more than an allegation.

“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.

Dochtor Kennedy, the president of AdvisorLaw in Westminster, Colo., and an attorney who represented clients on 58 of last year’s awards, said he believed one reason the arbitration cases doubled is the fact that there are more specialist lawyers than there used to be who are qualified to represent brokers in securities employment disputes, and more brokers are aware of their presence.

“It used to be there weren’t many firms that advocated for the industry reps. There were the more conservative firms that wanted to support the broker-dealers,” Kennedy said. “But firms like mine, we know these guys are punching bags. They might have had a great relationship with their manager, but at the end of the day they’re just a cog in the wheel. A lot of people never knew they could fight it, but now they do know.”

Regardless of the actual number of annual U5 arbitrations, the needle on wins for brokers has not really budged one way or the other over time. In 2015, 50% of brokers who sought arbitration won their cases. In 2019, the percentage was 57%, the high of the last seven years. In 2021, the percentage was back to 51%.

Although all the industry sources interviewed for this article expressed surprise that the percentage wasn’t higher, no one offered a clear answer as to why that’s the case. One reason for the shroud of mystery, however, might be that arbitration panels tend to be stingy with details in the written awards, especially when the decision is a denial of a claim.

The impact on some broker careers, however, is clear. An examination of Form U5 cases in 2015, 2019 and 2021 showed that, indeed, some brokerages assailed former employees with trumped-up charges designed to assign blame, retain assets and increase profitability.

And Finra is declining to change that.

Watch for Parts II and III of this series next week. Part II: The lack of brokerage accountability can turn careers to dust. Part III: Choosing a path forward when next steps are limited.

Read a condensed version of this series in the April 2022 print issue of Financial Advisor magazine.