(This is the third in a three-part series on broker-dealer U5 Forms.)

If there is a chance for brokers to influence the termination language in their Form U5, they should take it with gratitude, because more often than not there isn’t one, say lawyers and recruiters.

Brokers do have a small window in which they can negotiate a quiet departure in their termination language, but Finra filings suggest that broker-dealer companies keep that window short.

A broker trying assess how much room there is for negotiation first has to recognize there are different rules for brokers who are employees of a company than for those who are independent.

“In either case, you’re not letting the firm know you’re leaving until the day you’re ready to go. But if you’re independent, there’s not going to be any pushback on the U5 language because [the firms] don’t have a motivation to harm,” said Jodie Papike, president of financial services recruiter Cross-Search in Encinitas, Calif. “They don’t have advisors who are going to take that book of business.”

But for brokers who are employees of the larger wirehouses, it’s a different story, she said, and not just because the firms covet the clients’ assets.

“I have seen some advisors thrown under the bus over a firm issue. ‘Hey regulators, we got rid of a problem,’” Papike said in illustration. “But it really was a case of the firm not supervising properly or not having procedures in place.”

Under these circumstances, the firm will be less likely to have a conversation about the U5 language. The same goes for situations where there was a misunderstanding or an unintentional error.

“There is no set process,” she said. “I’ve seen situations where someone is trying to talk to the firm, but won’t get a call back. I see this harming advisors all the time. You just don’t know how long that window will be open for. If the firm takes 30 days, then you have room for negotiation. But they could file right away, and then you have nothing. Get an attorney.”

Louis Diamond, a recruiter and president of Diamond Consultants in Morristown, N.J., agreed, but added that not just any attorney will do.

“You need a specialist with experience with Finra and employment transitions,” he said. “It has to be a specialist, not the attorney who handled your divorce agreement or your brother-in-law.”

Depending on the circumstances of the termination, the broker’s attorney might be able to work with the firm’s counsel. But it’s not really a true negotiation, warned Barry Lax, the founding partner at New York’s Lax & Neville. No matter what the broker’s counsel might add to the conversation, the firm gets the final say.

The language of the form “has to be accurate and truthful,” Lax said. “But there are a lot of different ways to tell the truth and still be accurate.”

And even small differences in language can have a huge impact. In one dispute resolution between a broker and Wells Fargo, the two sides argued over the difference between the terms “permitted to resign” and “voluntary resignation.” That arbitration took two and a half years to resolve, and the advisor’s request for the latter language was denied.

The “claimant testified that he expected his CRD Form U5 would read ‘voluntary resignation.’ It was undisputed that ‘permitted to resign’ would be perceived very negatively by potential employers in the industry. And, indeed, claimant testified to multiple attempts to secure similar employment, including in places where he knew someone who had expressed a desire to work with him. Claimant was diligent in attempting to renew his career and testified that he submitted over 100 applications before ultimately securing a new position similar to the last one he held with [his former employer],” the Finra award stated.

“While it may be unfortunate that prospective employers would give such great weight to a CRD Form U5 entry that simply states that a candidate had been ‘permitted to withdraw,’ this is, indeed, exactly what happened,” the finding continued. “As the entry, which also specified that it was ‘not compliance related,’ was truthful and accurate, it was not defamatory, and therefore this panel cannot order expungement. It should be noted that this in no way represents a conclusion that it was ‘correct’ or wise to terminate claimant. This award reflects only that the CRD Form U5 language was accurate in describing what happened.”

For brokers unable to influence the U5 language, going forward with arbitration may be the right move, though some consultants recommend against it. It’s costly and time consuming, and it sucks brokers’ energy when it might be better for them to simply move on.

“Every day that ticks by where you’re not registered is a day someone else is taking your clients,” Diamond said. “Forget about a year and a half. That doesn’t matter. In three months you won’t have a business.”

For those who do forge ahead in the fight, the next decision is one of practicality. When filing with Finra, claimants can choose between a single arbitrator or a three-arbitrator panel.

If the broker is simply looking for expungement of questionable termination language with no monetary claims (or a low one of up to $50,000), the dispute can be decided in a simplified arbitration process in which a single arbitrator reviews all the materials from all parties and renders a verdict without an in-person hearing, according to the Finra website.

For expungement requests plus monetary claims up to $100,000, the sides can still use a single arbitrator, but it will take at least one in-person hearing, which adds to the cost of the dispute.

And finally, for expungement plus monetary claims above $100,000, the case will go before a three-arbitrator panel, which is even more costly.

“You have to be prepared for a fight,” warned Sharron Ash, chief litigation counsel at Englewood, N.J.-based Hamburger Law Firm. “You have to be prepared they’re going to fight because a rep signed off and said it’s truthful and accurate. So this process can cost $60,000, $70,000, $80,000 or more.”

“Figuring out which is best really depends on the situation,” said Lax. “It’s a tough question, and cost is an issue. One arbitrator will be quicker.”

Not just quicker, but also more likely to land on the side of the broker—slightly.

Overall, the trend is that claimants are preferring to go the single arbitrator route. In 2015, 79% of U5 cases went before a three-member panel. By 2019, that had dropped to 58%, and as of last year just 33% of all cases, won or lost, went before a panel and 67% were before a single arbitrator.

At the same time, wins edged up to 72% for the single arbitrator and dropped to just 28% in the cases before a panel.

“If an advisor has not suffered any adverse impact because of a U5 disclosure and experienced no resulting difficulty getting employed in the industry and is only interested in having a clean record, then a single arbitrator may make sense,” said attorney Laurence Landsman, a founder at Chicago’s Landsman Saldinger Carroll, a law firm that specializes in representing brokers and advisors in all areas of career transition. “On the other hand, if the advisor’s career has been decimated by a false or defamatory U5 disclosure, as is the case with many of my clients, then the damages that the advisor suffered in the form of lost wages may very well require the three-arbitrator option.”

Rebuilding A Career When All Else Fails
It’s no exaggeration that the U5 can bring out the dark and dirty side of the broker-dealer business, and for decent men and women grappling with this gut-punch for whatever reason, the prospect of life—and a career—going forward with sunny days ahead may seem impossible.

But there is hope.

Papike has been working with advisors in this situation for 23 years. “That’s what I do,” she said. “I help them so it takes the least amount of time possible.”

“If someone did something deliberately unethical, I obviously won’t work with them,” she said. “But it’s surprising how many situations there are where that’s not the case. Maybe the advisor messed up, but had no intention to harm. Maybe it was a paperwork issue, or they cut a corner but it was because the client asked them to.”

All brokers caught up in a U5 conflict face the same set of choices, and the first question to answer is whether it’s worth investing in challenging the termination notice. Knowing that there’s only a 51% chance of reversal and the facts leading to the termination must be false, with no mitigating factors, it might be time to put pride aside.

For example, Diamond said there was a tremendous increase in the number of brokers being terminated when they helped out a client with “docusigning” at the beginning of the Covid-19 pandemic.

“Advisors were logging into client accounts to help them, because clients didn’t know what to do,” he said. “If you’re in this situation, my job is to get you into the best possible firm in the quickest amount of time. The brokers who do the best are the ones who are from the jump incredibly contrite and apologetic, and kicking themselves for what they did wrong.”

Papike agreed. “These brokers have to salvage what they can, while they can, in order to make it,” she said. “It’s a really hard decision, but it’s usually not worth it to go up against a firm with unlimited resources for two years.”

Instead, Papike and Diamond follow a “next-spot plan,” sifting through the thousands of broker-dealers in the employment universe to find a good match. For those advisors who want to continue working for someone else, that’s still a viable career track, though some adjustment might have to be made.

“A lot of top firms have a don’t-take-a-terminated-person-under-any-circumstances policy,” Diamond said. “And maybe it takes the advisor being turned down a few times to realize the top-tier firms aren’t interested. Of course it hurts. But we hope to get you eight offers and then you choose the best from among the firms willing to take a terminated advisor.”

If terminated brokers have a history as $2 million producers, such firms might still see them as highly appreciated assets, Diamond said. Still, he warned, depending on the circumstances of the termination, it may be hard or impossible to get hired by a Finra-member firm. In those cases, he suggests, the best course might be dropping the Series 7 securities license and going into an RIA as an advisor.

Brokers who left their employer to start their own firm, or who decide that opening a solo shop is what they want to do after termination, will find the regulatory hurdles a little higher when having to address a blemished U5, which adds time where the broker cannot service his or her clients.

“I can’t overemphasize how traumatizing it is,” Papike said. “It used to be Finra was more difficult, but now individual states’ regulation is a long daunting task, and I’ve seen advisors treated like they’ve done something wrong before [they are even done with the process]. It’s no one’s fault. The states have staffing issues. There just aren’t a lot of folks within state registration departments. It doesn’t sound like that much of an issue, but when an advisor’s registration is held up, a day feels like a year.”

Whatever the strategy, it will take work and patience for a rep to stabilize a career after a defamatory U5 filing. A far better option, along the lines of an ounce of prevention equaling a pound of cure, would be for a rep to red-flag anything that might be misconstrued or blown out of proportion and consult with personal counsel while they are still with a firm.

“We get the calls when something is happening, or even after it’s happened,” Lax advised. “It would be better to get the call before. Just a quick, ‘What do you think?’ It could save a lot of time, money and stress.”

Part I – Deep-pocketed firms can wield the Form U5 like a cudgel.

Part II – A lack of brokerage accountability can turn careers to dust.

(A condensed version of this story ran in the April 2022 issue of Financial Advisor magazine.)