Brokerage Firms Using U5s as Leverage

March 6, 2013 It seems more and more often now firms are threatening reps with filing false assertions on a broker’s U5 when they depart a firm, so as to gain leverage over the representative. When a dispute breaks out between a representative and a firm whether it is because the representative learns of some compliance procedure or SEC rule violation that the firm is permitting and the representative raises it, often times the firm tells the representative to mind his own business. If they don’t and continue to complain they often suddenly find themselves out on the street and some false statement being input on the U5. Unfortunately this has become more of a problem since the Met Life case in New York held that firms are given absolute immunity from defamation actions based on U5 filings, where most states only provide limited immunity if the wrongful submission was not intentional.

Recently the New York Post highlighted this very problem with the brokerage firm John Thomas Financial and where FINRA launched an investigation of the firm’s alleged false filings as a result.

As a result of the New York Met Life decision, besides FINRA taking some action on their own, a New York broker’s (other states may only provide limited immunity from defamation actions) only choices to remove a false U5 filing(s) is to either:

(a) pay an attorney to file an arbitration claim for reformation of his CRD which does not provide for damages, but simply may remove the false assertion after meeting the stringent requirements, and gaining court confirmation of the arbitrators order;

(b) Seek damages by attempting to circumvent the Met Life limitation by asserting and proving that the brokerage firm not only filed a false U5, but went around to others and repeated such falsehoods which can be the subject of a defamation claim; or

(c) One can attempt to seek damages based on the negligent or intentional infliction of emotional distress, if one can prove such in FINRA arbitration rather than defamation related to U5.

The final choice is under recent guidelines in relation to the expanded information on FINRA Brokercheck. The representative may provide evidence and request that FINRA investigate such and remove the false assertion from FINRA Brokercheck if they deem it not true. However if the information is simply on the CRD and not on the public Brokercheck, the new process would not be available according to FINRA’s Guidelines. The requirements to avail one’s self to such mechanism is provided for on FINRA’s Web site where it stated that they have:


Formalize(d) the process for current and former brokers to dispute the accuracy of factual information disclosed through BrokerCheck. Brokers will be able to submit a written notice of the dispute to FINRA – FINRA will post the appropriate form on its website – with all available supporting documentation. If FINRA determines that the dispute is eligible for investigation, it will add a general notation to the broker’s BrokerCheck report stating that the broker is disputing certain information in the report – and that notation will only be removed when FINRA has resolved the dispute. If its investigation shows the information is in fact inaccurate, FINRA will update, modify or remove that information as appropriate.”

Any one of the above choices can in theory be done on one’s own, without an attorney, but by doing so one is starting out behind the eight ball as the representative would not know what is significant and what is not significant in order to obtain the results sought. In addition, pursuing arbitration is not simple, as it is guided by its own set of code provisions, rules and deadlines that the layperson would not realize. At the same time the experienced attorney for the brokerage firm would run circles around the representative. Such is why most pro-se (self represented) representatives lose in arbitration, even if their claim was valid.

Of course as with any change in employment, the representative can always file their own rebuttal when they arrive at their next firm so that both the prior firm’s statements and what the broker asserts appears on the CRD disclosure for investors and regulators to see. Often times this in itself may lead to significant problems for the former firm. One former client provided detailed information contradicting the former firm’s allegation within the U5 and asserted that he was basically a whistleblower attempting to stop violations of securities laws when he was fired for that reason. As a result, of the broker’s rebuttal U4 filing FINRA opened an investigation into the former firm, in addition to the representative retaining this firm to pursue a significant breach of contract, wrongful discharge, and defamation claim as his career was ruined by the former firm.

In the end firms which engage in the practice of attempting to penalize an employee for complaining about securities violations via marking up a broker’s CRD, are playing with fire. However, other issues such as disputes related to personalities, support, bonuses, etc obviously do not raise this type of concern for the firm and as such are more difficult for the representative to deal with and try to correct.

If you have an issue with FINRA Brokercheck, your CRD, or a U5 filing by your former employer it behooves you to contact an experienced FINRA attorney. Our attorneys have over a quarter of a century of legal experience including eleven years in prosecutor’s offices in New York and Manhattan under Eliot Spitzer and Robert Morgenthau.

We represent brokers and representatives from all across the country. Contact us for a free phone consultation Nationwide Toll Free 866-764-3100