Separating From Your Broker-Dealer: Making It Through the Minefield
When a registered representative leaves a FINRA-affiliated broker-dealer, the firm must complete a Form U5. This can be a simple step if you are leaving voluntarily and amicably. However, when your departure is contentious or less than voluntary, what is reported on your Form U5 can vary greatly depending upon the Compliance and Registration departments at the broker-dealer. More specifically, an individual in Compliance decides how your permanent record will reflect the events that led to your separation.
The first decision that individual in Compliance must make is whether to report your departure as one of three categories: “Permitted to Resign,” “Other,” or “Discharged.” Next, that individual, who likely has no loyalty to you at this point, determines the language used to describe what happened. This may include filing a Disclosure Reporting Page (“DRP”). All of the information reported is reviewed by FINRA, and FINRA must then decide whether or not to make an inquiry or open an investigation into the matter.
These early decisions that are made at the broker-dealer, most often before you are even aware of the termination, can affect you for as long as you remain in the industry. Such decisions may even determine whether you are allowed to remain in the industry.
For example, if you are terminated for lack of production, is that “Permitted to Resign” or “Other?” Both require an explanation. Is the explanation “lack of production,” or is it a long and convoluted sentence which will prompt FINRA to inquire at the very least?
Amidst more serious allegations and a termination for cause, the reporting becomes even more important. Which procedure(s) are you being accused of violating? Did you violate a FINRA Rule? Was it intentional? Was it an innocent mistake? Did the firm even listen to your version of the events? Are they in the wrong?
If a client has made allegations or a manager has suspicions of wrongdoing of any kind, even if the allegations or suspicions are demonstrably false, the firm is required to report it in most instances. Since some firm allegations may be politically or financially motivated to apply leverage to the advisor, how those allegations are reported will make a great deal of difference.
The firm has 30 days from the date of termination to file your separation (Form U5), unless there are allegations of fraud, theft, or other serious wrongdoing, in which case the firm has 10 days to file. Even though the days after a termination are difficult, it is important to be communicating with the firm during this period prior to the U5 filing. Many times, you may believe the separation is voluntary, yet when you receive your copy of the Form U5 in the mail, it reflects something entirely different.
What happens if the Form U5 is filed, and you are blindsided by the disclosure?
First, your public BrokerCheck report reflects the disclosure. The Compliance departments at any potential new firms will certainly review the disclosure. Some will ask for your side of the story; others will not. Many will see the reason for termination as the reason to tell the recruiter, “No, thanks.” Your choices moving forward may be limited, and, certainly, any transition assistance offered will be reduced or even eliminated. Finra’s broker-dealer examinations are based upon a program-wide risk hierarchy that includes these Form U5 termination disclosures, and top-tier firms routinely pass on new advisors solely due to the additional baggage to these risk models.
Second, FINRA may make an inquiry. If they do, you will receive a letter with multiple compound questions that must be answered honestly and correctly and drafted so as not to make the matter worse. Sometimes, if handled by experienced and precise representation, a response may result in FINRA closing the inquiry. Alternatively, the matter may move to the next step, where an investigation leads to on-the-record testimony (“OTR”) and, ultimately, some type of sanction. Sanctions can be anything, from a fine to a suspension of FINRA licenses, up to a bar from the industry. This is often the point of high-stakes negotiation when an advisor, who chooses to go it alone without seeking experienced counsel, can risk results that are significantly less favorable.
What if the disclosure made on your Form U5 was unfair? What if it was malicious? Now you have to live with it, right? Do you have to accept it and explain it every time anyone looks at your public BrokerCheck report? Not always.
AdvisorLaw has been successful in assisting financial advisors in obtaining expungement of negative Form U5 disclosures or, as a fallback, having them amended to a more accurate description of the event.
Each situation is different, and every disclosure must be reviewed carefully on a facts-based analysis. At AdvisorLaw, we have the proven experience necessary to help you repair your reputation and take back control of the narrative. AdvisorLaw proudly represents only financial advisors–never the broker-dealer, never the investor.”
Michelle Atlas is a licensed attorney who has been involved in the financial services industry for over 16 years. She has held FINRA 6, 66, 7, and 24 and Life and Health Insurance licenses and has held both Compliance and Sales positions at both large product companies and Independent broker-dealers.