In another case, the arbitration panel concluded that a defamatory U5 had been filed when a broker left UBS Securities to go to another firm. The broker was not alerted to the language in the U5 until he received a letter in the mail saying he was the subject of an official investigation into trading improprieties. The panel itself described the U5 as “retaliation” for the broker’s departure and recommended expungement, also recommending that a checkbox indicating the broker was under investigation for fraud should change from “Yes” to “No” and that the Internal Review Disclosure reporting page should be deleted in its entirety. The final decision was rendered December 2015, more than two years after the September 2013 initial complaint.
It took a full year for an arbitrator to determine that 11 complaints against another UBS broker were false. “It is far from clear how or why these customer claims were reported on [the] claimant’s CRD record, excepting, for the most part, confusion caused by various interoffice ‘team’ cross-coverage arrangements between [the] claimant and other financial advisors at the same branch office,” the arbitrator wrote in 2021.
All were cases where the firm fought the broker’s claim tooth and nail, sometimes over several years, while investing a lot of resources, despite having access to the same facts that the Finra panel ultimately had. If the resolution of the matter appeared obvious to the panel, it seems to raise the question of why the firm didn’t just retract its U5 statement earlier in the process.
One reason, experts say, might simply be that it’s financially profitable. “I think it’s safe to assume that the asset retention rate [for broker-dealers] is going to be higher [if] departing reps … have a mark on their U5 as part of that departure,” Kennedy says. “So add up all those numbers, reduce the legal costs, reduce the damages they pay to some of the reps—I don’t care how many firms you check, I’d be blown away if you could find 1% of firms where that wasn’t profitable.”
Despite these criticisms that the system isn’t working fairly, there may not be enough industry will to push for change. When asked for an interview to discuss policy and any institutional concerns that the regulations may be inflicting collateral damage, Finra declined.
Through its head of public relations, Ray Pellecchia, the agency released the following written statement: “Firms are required to provide timely, complete and accurate information on Form U5 (the Uniform Termination Notice for Securities Industry Registration). To protect investors and help ensure the accuracy of this information, Finra closely examines for compliance with this obligation and investigates when termination notices indicate potential rule violations.”
Industry professionals who are passionate about employment law in financial services were underwhelmed by Finra’s position. “Investors are not protected when advisors are wrongfully accused of misconduct,” Landsman says. “Finra must find the proper balance between investor protection and advisor integrity.”
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 U5. 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.
A perfect example of this kind of scenario is what Louis Diamond, a recruiter and president of Diamond Consultants in Morristown, N.J., says is a tremendous increase in the number of terminations over a broker helping out a client with “docu-signing” when the pandemic started. “Advisors were logging into client accounts to help them, because clients didn’t know what to do,” he says. “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 agrees. “These brokers have to salvage what they can, while they can, in order to make it,” she says. “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.”
“A lot of top firms have a don’t-take-a-terminated-person-under-any-circumstances policy,” Diamond says. “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.”
Sharron Ash, chief litigation counsel at Englewood, N.J.-based Hamburger Law Firm, says 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 they are that motivated, they will likely find sufficient evidence to inflict that pain, even on brokers who might not deserve it.
“It’s a competitive strategy. It’s weaponizing the U5 on the way out the door,” Ash says. “It shouldn’t be so easy to get a mark on your record, and so hard to get it off.”
This article, which ran in the April 2020 print edition of Financial Advisor, is a condensed version of a three-part series on U5 disclosures. The entire series will appear in early April on FA-mag.com.