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.