Form U5: The Importance of Engaging Securities Counsel Prior to Form U5 Submission/Disclosure

Many financial professionals, investment advisers, and registered representatives that we work with have had the privilege of working in the financial industry for over a decade or two, sometimes with the same firm. Amid the Great Resignation, we have seen clients either choosing to make a big career transition, or suddenly facing an unexpected termination as today’s workforce continues to change and the industry evolves in this post-pandemic world. When an individual employed by a broker-dealer or investment adviser leaves employment for any reason, whether voluntarily planning an exit or otherwise facing termination, Form U5 must be filed. Thereafter, the employing firm is required to provide the financial professional with a copy of the Form U5 within 30 days of the termination event.

Our team at Jacko Law Group, PC (“JLG”) understands that disclosures pertaining to an investment adviser or registered representative can impact one’s career. Transitioning can present its challenges especially when a reporting firm must disclose why an individual has left the firm and sometimes departures involve an alleged violation of “firm policy” or other disagreements. For this reason, it is best to engage experienced regulatory counsel who is familiar with this process as early as possible to provide guidance in navigating this departure and transition. This month, we review issues relating to Form U5 disclosures and look at a hypothetical case study where we discuss certain considerations that may arise in connection with a Form U5 disclosure and how engaging counsel early can help.

Hypothetical Case Study

 A seasoned investment adviser representative and broker (“advisor”) with over twenty years of experience in the financial industry had been promoted several times and was serving in a senior management role with his employer, which is a dual registrant (i.e., a broker-dealer and investment advisory firm). Unexpectedly, he was terminated.  Understandably, he was concerned as to what his former employer would say regarding his departure and how this would impact his career.

The prior company and reporting firm claimed that the reason for the termination was an alleged violation of a firm policy unrelated to sales practices or trading. The adviser disagreed with the way his departure was handled as there seemed to be a misunderstanding between the parties related to the firm’s policies and procedures. Unfortunately, despite the sensitive nature of the issues involved and the adviser’s attempts to address his concerns directly with HR, ultimately the adviser was terminated. Soon after the termination, the adviser was presented with a new opportunity with a potential employer who was interested in hiring him – but the firm wanted to know if there would be any problematic language on the Form U5 and the facts and circumstances leading up to the transition – before making a hiring decision.

The advisor sought legal guidance through this transition to help facilitate discussions with his prior employer regarding the proposed Form U5 language and to draft a Broker Statement to present to present to future employers. Additionally, the advisor needed assistance to ensure that he obtained any obligations owed to him from his former employer to include any deferred compensation.

In this instance, by engaging counsel early within the first week after his termination and in being proactive through the process in communications with the former employer, counsel was able to interface with counsel for the prior employer to request employment records and the advisor had an opportunity to discuss and review the proposed Form U5 language prior to it being filed within the thirty days.  As a result of his collaboration with experienced regulatory counsel, the advisor was able to know about and help to clarify, with the help of counsel, the Form U5 disclosure that ultimately was filed, including the stated reason for termination.

As a result, the Form U5 disclosure was known and could be discussed ahead of time with future employers, and the adviser has since been able to successfully transition into a senior leadership position with his new firm without incident.

Below we discuss how counsel can help to set expectations and steps advisors should consider after initial termination and prior to the filing of the Form U5 disclosure.

You have given notice or received a notice of termination. What’s Next?

Under FINRA Rule 3110, broker-dealer and investment adviser firms are required to file the Form U5 Uniform Termination Notice for Securities Industry Registration to terminate the registration of an individual within 30 days.[1] Typically, when, for example, an investment adviser receives a notice of termination, they often understand that the reporting firm has limited time to file the Form U5, but they don’t know what to do next or what to expect during this process and so they choose to consult with regulatory counsel for guidance and support. Upon engagement, we work with the financial adviser or professional to set reasonable expectations and foster discussions with the reporting firm and prior employer.

Once an individual has been terminated, the financial professional will call our team at JLG with questions wanting to know what their Form U5 will say or what their future employer will learn about the reason for their termination. Being proactive and engaging counsel early allows the opportunity to consult with an experienced attorney who can analyze your personal situation and reach out to your prior employer on your behalf before the Form U5 is filed, to ensure the accuracy of the disclosure. We will request your employee file and inquire as to the proposed disclosure language including the stated reason for termination – resigned, permitted to resign, discharged, or other.

Depending on the nature of the disclosure, counsel will also assist in drafting a broker comment in response to a disclosure that appears on the BrokerCheck.[2] Last, drafting a Broker Statement that outlines the professional’s career history and the circumstances surrounding the termination can be helpful to present to future employers and ultimately make a positive impact and result in a smooth transition to the next stage of a financial professional’s career.

Why JLG?

Our JLG team is prepared to work with you and to help you take positive steps after a termination. We believe that together we can work to achieve your desired outcome while mitigating future risks to your career and reputation.

At JLG, we care about our clients and our vision is to establish an ongoing relationship where your business and career goals are top priority. Our purpose is not only to serve our clients, but to protect and support you through this Form U5 reporting process and throughout your professional career in the financial industry. For more information on how JLG can help you with Form U5 disclosures, please contact us at (619) 298-2880.

Author: Alicia M. Bond, Director of Operations & Counsel; Editor: Michelle L. Jacko, Managing Partner, Jacko Law Group, PC (“JLG”).  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.  For more information, please visit https://www.jackolg.com/.

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[1] FINRA Form U5 Instructions at https://www.finra.org/sites/default/files/AppSupportDoc/p015113.pdf.

[2] https://brokercheck.finra.org/.

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