ARTICLE
18 April 2024

Defamation On FINRA Forms U-5 Of Financial Advisors In The Securities Industry Can Be Expunged

Kilgore & Kilgore

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Kilgore & Kilgore
An industry standard known as the FINRA Form U-5 is the personnel report used in the securities business to explain the reason for termination of a FINRA-registered...
United States Litigation, Mediation & Arbitration
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An industry standard known as the FINRA Form U-5 is the personnel report used in the securities business to explain the reason for termination of a FINRA-registered financial advisor or broker-dealer by an employer. The securities industry is regulated by FINRA, the Financial Regulatory Industry Authority, an independent, nongovernmental organization that writes and enforces the rules governing financial advisors, broker-dealers, and securities companies in the U.S.

Under FINRA rules, companies selling securities who employ brokers-dealers and financial advisors must file a FINRA Form U-5 within thirty days of the termination of a registered broker-dealer or financial advisor. If the termination was the result of anything other than the individual's death or voluntary decision to leave, the reason for the termination by the employer must be explained to FINRA. Such a report is called a FINRA Form U-5. The information on the FINRA Form U-5 is publicly available. Future employers can easily obtain them to learn about potential new hires.

This is where the predicament takes on a more serious consequence for the financial advisor or broker-dealer. Beyond the fact of the termination, negative information about the fired employee's performance on a FINRA Form U-5 can be career-ending. A negative performance review follows a financial advisor or broker-dealer, particularly in a personal service industry, and may hamper this employee's ability to find new clients or a new job in the securities industry.

If the reason for a termination is reported by the employer in a false, retaliatory, or an inappropriate manner, it reflects negatively on the reputation of the financial advisor or broker-dealer because it goes to the issue of honesty. Many supervisors take a casual view of the information they report on a FINRA Form U-5, thinking it is a mere nuisance, part of the job, and do not realize the damaging effect of that report. Such a report may render the employee unemployable in the securities industry.

False and Defamatory Statements on FINRA Forms U-5 Regarding the Performance of Financial Advisors and Broker-Dealers Have Harmed Their Careers

Several years ago, at the height of the Wells Fargo Bank fake account scandal, that bank fired thousands of retail bank employees for allegedly creating fake applications and bank accounts. Approximately 200 of the fired employees, who were registered with FINRA, claimed that they were fired or pushed to resign after resisting pressure to sell unwanted products to customers and for reporting unethical practices.

Wells Fargo Bank, they claimed, retaliated against them with false and defamatory information on their FINRA Forms U-5. Left unchallenged, those statements could have ended their careers. The U.S. Senate held hearings, FINRA investigated, and the Consumer Financial Protection Bureau (CFPB) ultimately fined Wells Fargo Bank $185 million. Apart from the federal action, this story brings into sharp focus the role that state law plays in Form U-5 defamation lawsuits.

In Texas, defamation occurs when a party makes false statements of fact about a person, product, or business. To win a defamation lawsuit in Texas, an injured person must show that:

  • The defendant made a false statement about the person, business, etc.
  • The defendant communicated that statement to a third party.
  • The employer's statement caused reputational or material harm.
  • The defendant acted either negligently or purposefully.

Private citizens need not show actual malice, only that the statements under review were negligent. In other words, a defendant like a broker-dealer must take "reasonable care" to find out if the statements made were the reasons for termination of employment were true or false. It is important to keep in mind, though, that defamation laws in each state have developed under slightly different precedents, so it is wise to work with someone specifically versed in Texas law when pursuing a Texas defamation case.

The Rumor Mill and the FINRA Form U-5

Consider the case of Mel Schonhurst. He was a managing director, financial advisor, and successful bond executive with RBC Capital Markets. Unsubstantiated allegations appear to have cost him his job and reputation. RBC terminated his employment after an industry publication, The Bond Buyer, named him in connection with a federal investigation at RBC.

His FINRA Form U-5 report noted that RBC was informed by an FBI agent that Mr. Schonhurst was the subject of an investigation. This report created the impression that the FBI had evidence linking him to a public corruption and bribery scandal in the bond market in El Paso. He was never charged, and the investigation was closed. Thereafter, he was unsuccessful in gaining new employment in the bond industry. More than seven years after his wrongful termination became a matter of public record, Mr. Schonhurst obtained a FINRA arbitration award that ordered RBC to amend its FINRA Form U-5 filing on him to correct the information by adding a statement indicating that no charges arose from his employment with RBC.

FINRA Arbitration Rules and Processes

As an independent industry organization, FINRA provides an arbitration forum and code of procedure for dispute resolution and brings disciplinary actions for violations of its rules. FINRA normally prefers arbitration over litigation. Consequently, most FINRA Form U-5 defamation claims are resolved through arbitration before a specialized, private forum of typically three individuals.

Potential claimants should be aware that the processes and procedures of arbitration are different from what most people know about litigation. It is a very specialized area. Among the disadvantages of this approach is that the decisions of the arbitrator panel generally do not create legal precedent. They may be kept secret. They do not apply to collective or class actions. They are difficult to appeal – which is even more incentive to get it right at the beginning.

On the other hand, the panel of arbitrators is fully familiar with FINRA rules and processes. The arbitration forum may also order expungement of disparaging information and correction of the record of a financial advisor or broker-dealer. This can revive a damaged career. The payment of compensatory damages to repair the financial harm wrecked by the defamation can help set this person up for future success. Still, these remedies cannot give back to the financial advisor or broker-dealer who was harmed the success s/he experienced before.

Originally published 24 February 2023

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

ARTICLE
18 April 2024

Defamation On FINRA Forms U-5 Of Financial Advisors In The Securities Industry Can Be Expunged

United States Litigation, Mediation & Arbitration

Contributor

Kilgore & Kilgore
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