Can I Sue My Brokerage Firm for Filing a False Form U5?

Can I Sue My Brokerage Firm for Filing a False Form U5?

Financial firms that deal in securities do carry legal liability for filing a Form U5 with false information, and financial advisors can indeed sue their former firms for filing an inaccurate Form U5.

Whenever a brokerage firm terminates the employment of a broker or financial advisor, the firm must file a Form U5 – the Uniform Termination Notice for Securities Industry Registration – with the Financial Industry Regulatory Authority (FINRA) within thirty days of termination.  The Form U5 is differentiated from the Form U4 – the Uniform Application for Securities Industry Registration or Transfer – which is filed upon a broker’s registration with a firm, whereas the Form U5 is filed upon the broker’s termination. The Form U5 requires a firm to provide accurate answers to various questions, including the reason for a broker’s termination.

Brokerage firms submit the Form U5 electronically to the Central Registration Depository (CRD), which is the system FINRA oversees for licensing and registration of the U.S. securities industry.  The CRD can be electronically accessed by regulators, parties within the securities industry, as well as the general public.  Accuracy of the information in the CRD is paramount, and it is relied upon for several important functions:

  1. It alerts FINRA and other state regulators where there could be disciplinary matters;
  2. It avails information to retail consumers who want to learn about a broker’s disciplinary history; and
  3. It similarly notifies brokerage firms about a broker’s disciplinary history, which firms will use in making hiring decisions.

Inaccuracies on a Form U5 not only undermines a key FINRA mandate, which is to promote market integrity, but it can clearly hinder job search efforts for a broker who is interviewing with other firms.  This is because the range of inaccuracies on a Form U5 can range from innocent or simple clerical errors, to damaging and intentional falsities.

In addition to the thirty day filing requirement, FINRA has also reminded firms of their obligation to submit an amended Form U5 when a firm learns of facts or circumstances that would cause a previously filed Form U5 to be inaccurate or incomplete.  When a firm fails or refuses to do so, it can sometimes leave a broker with no other recourse except to sue his or her former firm.

Lawsuits against brokerage firms are typically filed in FINRA Arbitration, the forum where securities industry disputes are typically resolved.  Typical claims that a broker can allege against a firm for Form U5 inaccuracies include violation of FINRA Rule 4530 and Article V, Section 3 of the FINRA By-Laws, which outline a firm’s general reporting requirements, including the obligation to timely and accurately file a Form U5.  A broker can also bring claims of negligence, fraud, and other more typical employment law claims, such as breach of contract, tortious interference with contract, and defamation.

Defamation suits can be especially appropriate where the firm’s inaccurate filing has harmed the broker’s reputation and has led to subsequent employment rejections by other financial firms.  Statistics from FINRA Dispute Resolution show that Form U5 defamation cases have generally been on the rise, with cases increasing each year since 2013.  Form U5 defamation cases are the fourth most popular type of intra-industry claim (behind breach of contract, promissory notes, and compensation), with a total of 124 cases filed in all of 2016, and 51 cases filed year to date through May of 2017.  In such cases, brokers have been successful in receiving substantial arbitration awards in their defamation claims against major brokerage firms, including $4.8 million against Morgan Stanley, $3.25 million against Questar Capital, $1.8 million against PNC Investments, $350,000 against J.P. Morgan, and $530,000 against Wells Fargo.

The impact of a falsely filed Form U5 should be taken seriously by any financial advisor, as it can effectively blacklist the advisor from ever being hired again within the securities industry.  It is thus important to talk to an attorney who can determine whether filing a Form U5 defamation suit is the right step to take, or whether there are alternate options, such as an expungement action, which could be equally effective towards clearing a broker’s disciplinary record and restoring one’s good name.