When a brokerage firm wants to intimidate a broker, nothing works better than the Form U5 termination notice, the form through which the firm discloses the reason for a broker’s departure. A negative disclosure can have far-ranging implications on a career, and so many brokers see the U5 as a set of brass knuckles glinting in a dark alley.
In fact, sources across the industry view the Form U5 as one of many inducements driving more brokers to drop their securities license altogether and migrate to the RIA world, where they would not be open to the same vulnerability.
“Advisors are terrified by what can happen. Having something negative recorded on a U5 is a momentous thing,” says 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. Even if they are just considering a move from one firm to another or to hang out their own shingle, the next move is critical.
“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,” counsels Jodie Papike, president of Cross-Search in Encinitas, Calif., a financial services recruiter who 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.”
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 version of the circumstances of the breakup. If the circumstances involve a client, the firm’s version gets logged immediately on BrokerCheck, the popular tool for looking up the records of brokers that’s used by customers and potential employers alike. The posting to BrokerCheck happens even if the broker’s version of events differs vastly and the broker files for arbitration.
“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,” says 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.”
As the broker-dealer universe has grown over time, so have 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 the forms were incorrect and defamatory. In 2021, that number had doubled to 206.
Dochtor Kennedy, president of AdvisorLaw in Westminster, Colo., and an attorney who represented clients on 58 of last year’s awards, says he believes 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 says. “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 highest of the last seven years. In 2021, the percentage was back to 51%.
In one such case, a broker was awarded more than $1 million, granted expungement and won a change in the termination language to read: “Continual disagreements over compensation and job duties interfered with the employer’s ability to conduct its business in a collegial and effective manner.” This broker’s team argued that this was clearly not a customer-related transgression that should have resulted in an entry on BrokerCheck, and yet it took from June 2014 to November 2015 for the broker to see the expungement remedy. The firm representing the broker was Odeon Capital Group.