Introduction
Form U5 is the Uniform Termination Notice for Securities Industry Registration used by broker-dealers and investment advisers to report information about a variety of matters regarding a registered representative or investment adviser representative (“associated person”) of that firm.1 The information on Form U5 is stored in the Central Registration Depository (“CRD”) system, where securities firms and regulatory authorities report a variety of disclosure events regarding associated persons, including civil judicial actions, criminal matters, customer disputes and complaints, employment terminations, internal reviews or investigations of an associated person, financial matters (e.g., personal bankruptcy) and regulatory and disciplinary actions.
This month’s Legal Risk Management Tip addresses Form U5 reporting matters and certain considerations relating to a termination event and issues that may arise in connection with an associated person’s Form U5.
Reporting Firm Obligations Regarding Form U5
1. Overview
Financial industry reporting firms are required to file a Form U5 when an associated person leaves a firm for any reason. A firm must provide enough detail on Form U5 so that a reasonable person may understand the circumstances described on the form. In practice, if an associated person is fired, that person prefers to have a generic description of the circumstances relating to the termination, which are almost universally unfavorable for the associated person. Conversely, the member firm from which the associated person was terminated has an obligation to provide details so that a reader (i.e., a regulatory agency, a new employer or a prospective client) of the form disclosures can ascertain why the associated person was let go. For example, it is not sufficient to report that an associated person was terminated for a violation of “firm policy;” instead, the firm should identify the policy and provide enough detailed facts and circumstances to enable the reader to appreciate what conduct was involved.2
2. Deadline for Form U5 Filing
A reporting firm is required to file a Form U5 for an associated person within 30 days of a termination event.3 In addition, a firm is obligated to amend a Form U5 when it learns of facts or circumstances that make a previously filed Form U5 inaccurate or incomplete. For example, if a firm reports that it has initiated an internal review in response to Item 7B, regulators expect the firm to file an amendment to Form U5 once the internal review is complete to report the findings of such review.4
Why Form U5 Reporting Matters
1. Financial Industry Participants Focus on U5 Language
The information reported on Form U5 is reviewed and relied upon by several financial industry participants, which include:
- Regulators (g., the SEC) and self-regulatory organizations (e.g., FINRA) reporting on disciplinary events regarding an associated person;
- Registered investment advisers and broker-dealers reviewing an associated person’s background when making employment decisions;
- Licensing authorities (e.g., state regulators, insurance regulators and professional credentialing organizations, such as the CFP Board and CFA Institute) that review license applications and renewals; and
- Prospective clients or investors when performing due diligence on an associated person or his/her firm;5
Not surprisingly, most associated persons first encounter Form U5 issues when that person makes a transition from one financial industry firm to another.6
2. Form U5 Disclosures Impact Employment Hiring Decisions
Dependent upon the Form U5 disclosures provided, prospective employers often investigate the facts and circumstances surrounding the individual’s termination, including any “yes” answers on the disciplinary report page (DRP), as applicable. This often results in requests from the employer for the associated person to provide a written summary to the chain of events which led to the termination, which often take one of three forms:
- Voluntary resignation (where an associated person leaves on good terms);
- Involuntary termination (where an associated person is fired or laid off);7and
- Permitted to resign (where an associated person is encouraged to resign after a negative situation unfolds at the firm).
Logically, there should not be confusion about which of the above scenarios applies. However, in certain instances, the reporting firm and the associated person interpret the same set of facts differently, which can lead to concerns. For example, if a firm intends to terminate an associated person on the day that person hands in a resignation letter, how the firm decides to report a separation event will be based on facts and circumstances. The manner in which a termination is reported can materially impact the associated person’s ability to obtain future employment, dependent upon the nature of the disclosures provided. Thus, it is important to clarify the reporting firm’s intent prior to any findings.8
3. Regulators May Investigate
Each Form U5 disclosure submitted by a reporting firm is reviewed by regulatory authorities, which may contact one or both parties to get additional information about what occurred. Using FINRA as an example, if an explanation filed on Form U5 is interesting from a regulatory view, it is common for FINRA to contact the reporting firm, associated person, or both to request more information. This type of contact from FINRA typically takes the form of an “8210 Letter,”9 which asks for additional information.
Can U5 Language Be Amended or Changed?
Amending language reported on Form U5 is an available option, however, the expungement10 process through which that type of relief must be sought is costly, time-consuming and uncertain. Expungement is essentially an arbitration proceeding where the associated person is required to demonstrate that the Form U5 language submitted by the reporting firm is fundamentally flawed, defamatory or incorrect. Like any arbitration or litigation-related process, the chances of prevailing cannot be predicted with any type of certainty, which is a daunting consideration when the costs of the proceeding and attorney fees are factored in to the analysis. In addition, an associated person that wins an expungement hearing does not have a problematic disclosure erased. Rather, the rules call for a replacement disclosure that more accurately describes the circumstances of termination to be submitted in place of the original, erroneous language.11
Strategic Considerations Regarding Form U5
Associated persons seeking to minimize the impact of a Form U5 disclosure should consider the following steps:
1. Be Proactive.
Once a termination occurs, the clock starts ticking on the Form U5 filing deadline. Any associated person who anticipates an issue relating to how their departure is going to be described should take action as soon as possible. Firms have up to 30 days to file, but they do not have to wait that long. This period will go by fast, so there is no reason to wait to take this step. Often it is prudent to seek legal counsel to interface with the reporting firm on your behalf. In addition, any outreach to the reporting firm inquiring how a termination will be reported should be in writing so there is no question about when the contact was made.
Getting the disclosure particulars and details correct is in the best interest of the associated person and required by the rules that apply to the reporting firm. While firms are not permitted to negotiate Form U5 language, often a company will be willing to engage in meaningful dialogue relating to the circumstances of the associated person’s termination to ensure termination details are properly understood and accurately reported.
2. Consider Engaging Counsel.
When it comes to U5 matters, generally, it makes sense to consult with experienced regulatory counsel whom are familiar with the rules that apply to reporting firms, and to the Form U5 reporting process. Either on the forefront of discussions or behind the scenes, working with an attorney during this initial period after a termination can provide an associated person with a deeper understanding of the overall Form U5 reporting process and help to set reasonable expectations. Where necessary, injecting counsel directly into the discussions can help demonstrate that an associated person is taking the Form U5 disclosures seriously. Experienced securities counsel can serve as a knowledgeable advocate to ensure that all the parties arrive at an accurate disclosure of the relevant details.
For more information on how JLG can help with Form U5 matters, please contact us at (619) 298-2880.
JLG works extensively with investment advisers, broker-dealers, investment companies, private equity and hedge funds, banks and corporate clients on securities and corporate counsel matters.
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The Risk Management Tip is published solely based off the interests and relationship between the clients and friends of the Jacko Law Group P.C. (“JLG”) and in no way be construed as legal advice. The opinions shared in the publication reflect those of the authors, and not necessarily the views of JLG. For more specific information or recent industry developments or particular situations, you should seek legal opinion or counsel.
1 FINRA Form U5 Instructions.
2 FINRA Regulatory Notice 10-39.
3 FINRA By-Laws, Article V, Section 3.
4 See FINRA Regulatory Notice 10-39.
5 Certain information reported on Form U5 is available to the public via the BrokerCheck website at https://brokercheck.finra.org/.
6 In addition to Form U5, there are a number of other issues to consider when an associated person transitions to a new firm which are outside the scope of this article. See: https://www.jackolg.com/Room/News-Room/Archive-2018/October-Strategic-Considerations-For-The-Transitioning-Advisor.shtml.
7 Whenever an involuntary termination occurs, the reporting firm is required to provide detailed information surrounding the termination.
8 Form U5 must be filed within 30-days of an associated person’s termination.
9 FINRA Rule 8210 contains FINRA’s subpoena power and any correspondence issued under this rule should be taken seriously. For additional information about 8210 Letters, see: https://www.jackolg.com/News-Room/ARCHIVE2017/What-To-Do-If-You-Receive-a-FINRA-8210-Letter-Oct-2017.shtml.
10 This article refers to intra-industry expungement. Expungement is also sought in the context of customer compliance. For a more detailed discussion of the expungement process, see https://www.jackolg.com/News-Room/ARCHIVE2017/JLG-Legal-What-You-Need-To-Know-About-Expungement.shtml and https://www.jackolg.com/tip-FINRA-Expungement-Part-II
11 Note that an associated person can submit a broker comment that provides additional information, so long as certain criteria are met; see https://www.finra.org/industry/guidelines-broker-comments-brokercheck.