Form U 5
What is the Form U 5 Uniform Termination Notice for Securities Industry Registration?
The Form U5 ends a financial advisors’ registration with FINRA member firms. When a financial advisor resigns, or is terminated, FINRA member firms are required to submit a Form U5 to FINRA. The Form U5 provides information to FINRA about the circumstances surrounding the termination.
Typically, the financial advisor’s former firm’s compliance department, answers a series of termination and disclosure questions on the Form U5 as part of the member firms’ reporting obligations under FINRA rule 4530. The information from the Form U5 (similar to U4 Form information that the new firm must fill out), becomes part of the Central registration depository CRD database and are filed electronically. The central registration depository houses registration and licensing information for FINRA member firms and registered representatives.
Elements of the information from the CRD becomes publicly available on BrokerCheck.
(Please review our BrokerCheck “How-to” Guide for instruction on using this online tool).
What termination disclosure questions must a FINRA member firm answer on Form U5 ?
Setting aside the generic information the U5 covers, (i.e. background information; termination and residential information; and branch office address information), there are two categories of disclosure questions firms must answer. Issues can arise from either:
- Issues that stem from the firm’s obligation to answer disclosure questions pertaining to the reasons why the financial advisor left the firm.
- Issues that stem from the firms’ ongoing obligation–after a financial advisor has left the firm–to disclose:(A) Customer complaints or FINRA arbitrations where a client alleges securities industry misconduct that occurred during the financial advisors’ employment with the former firm.(B) Regulatory investigations or criminal actions that concern violations of securities industry rules that occurred while the financial advisor was employed with the member firm.
Was the termination voluntary or involuntary?
Voluntary termination considerations:
A firm must provide an affirmative response on the Form U5 if the financial advisors’ full termination was voluntary or involuntary.
If the termination from the firm was voluntary, the Form U5 asks a follow-up questions concerning any pending internal review or investigation as of the termination/resignation date. If there was a pending investigation concerning securities misconduct or the wrongful taking of property, the firm must provide additional information on the Form U5 disclosure reporting pages (DRP).
The DRP pages of the Form U5 ask the broker dealer to state the conclusions reached relating to any internal investigation into securities misconduct or the wrongful taking of property following a voluntary resignation. The firm must also provide detail on any internal investigation that did not relate to securities misconduct, though that information typically does not become publicly available on BrokerCheck.
If the investigation confirmed securities-related improper conduct, that information (along with potentially other information) gets disclosed publicly on BrokerCheck. And again, this information appears even if the resignation was voluntary. The financial advisor will also likely be subject to additional investigation from FINRA.
Through these reporting requirements, FINRA wants to ensure that a registered representative does not avoid proper investigation for allegations of financial misconduct by resigning before they are formally terminated.
If no internal review was pending at the time of the investigation, broker dealers do not have to provide any additional information on the Form U5.
The subjective determination as to whether the resignation occurred while the individual was under investigation for securities misconduct can lead to litigation.
For example, suppose the registered representative voluntarily resigns. And when he does, he had no knowledge that he was under a pending investigation. He was, however, aware of an internal investigation into whether he excessively traded or churned client accounts several months earlier.
When the broker resigned, the investigation was not yet closed. And even though the investigation dragged, the firm must disclose the existence of a pending investigation on the Form U5, which would alert other broker dealers and prospective employers with access to the CRD system. This can impact future employment with another firm. And until the investigation formally closes, and the reporting firm notifies FINRA through an amended disclosure, the negative U5 disclosure remains.
Involuntary termination considerations
Firms that terminate individuals must state on the U5 that the termination was involuntary. If the reason for the termination related to allegations of securities related misconduct, firms must provide additional disclosure information on the DRP pages attributable to involuntary terminations.
This typically triggers reporting to BrokerCheck and a FINRA investigation into the allegations.
If you are a broker subject to a pending FINRA investigation,
If the involuntary termination was unrelated to securities misconduct, the firm still must include a termination explanation and provide sufficient detail. But this disclosure typically does not trigger public, BrokerCheck disclosure nor investigation from FINRA.
That said, prospective employers with complete access to the CRD system may still see the termination disclosure.
The subjective determination as to whether a termination involved securities related misconduct is also the subject of regular litigation. Depending on the broker dealer’s independent conclusions about the nature of the circumstances surrounding the termination (i.e. whether it involves securities misconduct or not) is the difference between additional FINRA investigation and public disclosure, and no negative impact.
Pending securities related criminal or regulatory issues
If a broker is subject to criminal investigation, regulatory investigation, or enforcement action for securities related misconduct at the time of termination or resignation, that too must be disclosed on the Form U5.
If you have an issue pertaining to the information on your Form U5,
The Form U5 and customer dispute information
If a customer makes a complaint either formally, by initiating a FINRA arbitration, or informally, through a written complaint, the firm must report that information on the Form U5.
The questions the broker-dealer must answer on the Form U5 are identical to the questions concerning written customer complaints included on the Form U4. But the firm uses the Form U5 if the financial advisors “involved” in the customer dispute no longer work for the firm.
This is part of FINRA firms’ ongoing obligation to report to licensing authorities about potential securities misconduct for an individual previously terminated.
Written customer dispute information (regardless of merit) appears publicly on BrokeCheck. The FINRA Form U5 does permit the broker to fill out the U5 broker comment form in response to the complaint. The broker comment form allows the financial advisor to provide an explanation of what occurred, which also appears on BrokerCheck.
We cover the extremely broad scope of FINRA firm reporting obligations under FINRA rule 4530.
Can Form U5 information about customer disputes be expunged?
Given the extremely broad scope of the FINRA reporting rules, many customer disputes that appear on BrokerCheck are meritless. Financial advisors may seek removal of meritless complaints under FINRA rule 2080 through FINRA’s expungement process. FINRA has endeavored to change the FINRA expungement process to make it more difficult to earn expungement of customer dispute information. It remains to be seen if the changes will impact the success rate of expungement cases.
(EDITOR’S NOTE: The FINRA expungement rules are changing. Soon, it will be even more difficult to remove meritless disclosures from BrokerCheck.)
Can Form U5 information about employment-related violations of securities industry rules trigger defamation claims?
An individual may make a defamation claim if a bad actor publishes false information about a person that harms their reputation.
Defamation claims may be made in connection with a termination event disclosed on the Form U5. Such defamation claims are typically subjected to the FINRA arbitration process, where an arbitration panel decides the case. FINRA arbitration panels routinely hear these types of cases.
Defamation claims arising out of U5 disclosure information typically involve allegations that the firm submitted inaccurate Form U5 information concerning the circumstances of a termination. Given that Form U5 termination information can create issues with relevant regulatory and licensing authorities, and can lead to FINRA disciplinary action and investigation, inaccurate information on the Form U5 can create serious problems.
Most firms vehemently defend defamation claims based on the argument that their regulatory obligations require disclosure, and for that reason, they are immune from prosecution of any defamation claim.
Financial advisors who believe their old firm included inaccurate information on their FINRA form U5 should seek the advice of experienced counsel.
Who has access to the information from the Form U5?
Prospective employers, state securities regulators, federal securities regulators, and FINRA member firms have complete access to the FINRA CRD system, including all information provided on a broker’s U5.
Can a financial advisor have damaging, employment-related Form U5 information expunged?
A Financial advisor may have inaccurate information included on their U5 expunged. But the process is generally contentious. For that reason, brokers should seek the advice of experienced counsel to assess their employment-related expungement case.
*The Law Offices of Patrick R. Mahoney is a full service law firm with extensive experience handling FINRA arbitration cases. This page is for information purposes only and does not constitute legal advice.