Firms “Weaponize” U5 Termination Filings
(Adds information in the seventh paragraph on Finra’s solicitation of U5 complaints from former Wells employees.)
In October, Metehan Erim won his battle to have J.P. Morgan Chase expunge a termination filing that accused him of altering client documents. The arbitration panel that ruled in his favor also awarded him $300,000, saying the U5 filing sent to the Financial Industry Regulatory Authority and other regulators defamed the private banker.
While Erim, now with Waddell & Reed in New Jersey, notched a victory, his complaint is emblematic of a growing trend in which firms use the to damage brokers’ reputations and dissuade customers from following them to new firms, say employment lawyers who represent brokers.
When brokers are fired, a summary of the U5 appears on Finra’s widely publicized BrokerCheck database and can insinuate that a broker was dodgy.
“They’re using it as a competitive tool,” Sharron Ash, chief litigation counsel at MarketCounsel said of firms’ growing aggressiveness in filling out U5 forms. “Depending on the boxes they check, maybe they decide you’re under internal review and you don’t find out that you’re under internal review until you left.”
Even Congress has raised questions about securities firms’ alleged abuse of the forms.
“[P]ublic reports indicate that Wells Fargo may have filed inaccurate or incomplete Form U-5s for fired employees and that the bank may have done so to retaliate against whistle blowers,” Senators Elizabeth Warren (D-Mass.), Ron Wyden (D-Ore.) and Robert Menendez (D-N.J.) wrote in The letter was one of a growing number of corollary issues cropping up for the San Francisco-based bank company as a result of the fake-account scandal that cost it $185 million in September.
Finra on Friday said it was to provide “instances where they believe there are material issues associated with the processing of their Form U5, including the accuracy and completeness of the language filed by Wells Fargo Advisors.”
Ash, speaking on Tuesday at a MarketCounsel conference that was attended by some wirehouse brokers toying with becoming registered investment advisers, said decisions firms make on termination filing wording can “make all the difference“ in moving a practice in a timely manner to another firm or even in continuing in the brokerage industry.
To be sure, employers are rarely reckless in marking up U5s because sanctions can be severe. Finra can bar or suspend firms and/or responsible principals for filing false, misleading or inaccurate information and fine individuals as much as $73,000, according to the self-regulatory group’s guidelines. A principal consideration in determining sanctions includes whether a firm’s filing misconduct “resulted in harm to a registered person,” the guidelines say.
“It’s a double-edged sword,” Michael T. Roche, a lawyer at Schuyler, Roche & Crisham in Chicago who works with firms as well as employees, said of the temptations to use U5 filings aggressively.
Simply filling out the U5, which is due within 30 days of a broker’s leaving, is fraught with pressure as compliance officers and supervisors balance reporting requirements and the hunger to retain customer assets against the risk of defamation claims, Roche said.
Brokers’ lawyers and firms often negotiate for weeks on the wording of U5s, which can be an expensive process for the departing financial advisors.
“Everyone understands the potential for defamation,” said a former New York-based field manager at Morgan Stanley, who spoke on condition of anonymity.
Company lawyers are also counseling branch and regional managers to be extremely cautious in the persuasion tools they use to retain assets of departed brokers.
“Once wirehouses are actually calling brokers’ clients, they don’t say a word so as not to walk into the territory of potentially defaming a broker,” Ash said at the conference. “They simply send a link to the BrokerCheck report and say, ‘If you want to know why he left, look at this link.’”
Brokers who succeed in challenging allegedly misleading filings grab occasional headlines (see this JPMorgan case and this Morgan Stanley case), but the financial and psychological costs of arbitration dissuade most brokers from filing defamation and expungement claims, lawyers said. By the time such claims wend their way through the months- and sometimes years-long arbitration process, reputational damage may have been done.
“Something that’s false can be out there a long time,” said Jeffrey Riffer, a lawyer at Elkins Kalt Weintraub Reuben Gartside LLP in Los Angeles, who represents brokers. “It costs money to expunge and some people are like, ‘It’s not worth it.’”
—Jed Horowitz contributed to this story.