Legal News

U-5 Process Could Compound Job Problems

Carol E. Curtis


20 August 2007

(c) 2007 Securities Industry News and SourceMedia, Inc. All rights reserved.

While investors may be worried about losing money in the current volatile market, securities industry professionals have a self-interest at stake: their jobs. In what could be a leading indicator, Bear Stearns Companies said Thursday that it is cutting 240 jobs in its mortgage lending unit.

Aside from the workforce cuts that tend to accompany down cycles, terminations in this age of reputational risk also bring with them a blinking red light in the form of the Uniform Termination Notice for Securities Industry Registration, known as Form U-5. As increased oversight compels broker-dealers to be forthcoming with information on these documents, licensed professionals can find themselves barred from the industry if negative information gets into the hands of a potential employer.

The upshot, according to experts, is likely to be a proliferation of challenges seeking to strike from the record negative information on Form U-5. The process requires an arbitration proceeding conducted by the Financial Industry Regulatory Authority (Finra), the self-regulatory organization (SRO) formed from the recent merger of NASD with the member-regulation functions of the New York Stock Exchange.

"A U-5 follows you anywhere in the industry," explains John Singer, partner in New York law firm Singer Deutsch. Any accusation of misconduct can prevent the employee from obtaining another job in the securities industry, which can become ever more challenging in a market downturn or prolonged turbulence.

When a licensed professional is terminated for any reason, Finra rules require the firm to complete a U-5. If the separation was unfriendly, or if the employee was simply "permitted to resign," the firm must give a reason. It could cite an innocuous-sounding "mutual agreement," or it could say a lot more.

The broker-dealer has 30 days to file the U-5. The employee may not know what it says until it is filed, and if that person feels that the language is inaccurate or unfair, he or she must move quickly toward arbitration. Speed is of the essence, because potential employers in the securities industry typically review a U-5 during the hiring process.

"We have seen a proliferation of U-5 cases [at our firm]," says Singer, an experienced arbitrator and litigator who started Singer Deutsch in 2003 after stints on the defense side at Proskauer Rose and Rosenman & Colin. Singer's firm specializes in securities employment issues, including U-5 cases, as well as cases involving withheld bonuses. "In the current market environment, there is an upward trajectory in these cases partly because in most states, arbitration panels have been liberal about awarding damages," Singer says. He adds that there are more employees in the industry, and increased oversight has made firms more conscientious about adhering to their obligations in filling out the form.

Though there are no hard numbers, Singer Deutsch partner Michael Deutsch says the number filed of Form U-5 arbitration cases has historically exceeded 200 a year. An official at Finra said that the SRO does not maintain data on these cases, so cannot confirm whether they are increasing.

"This is a very hotly contested area of the law, because while the 30-day requirement [to file U-5s] is consistent, state law comes in with respect to the defamation aspect," Deutsch explains.

In New York and California, for example, you can clear the record if you can prove defamation, but you cannot collect damages. However, the upside for the plaintiff is that securities arbitrators have discretion to award damages. Unlike in a formal legal proceeding, arbitrators do not write reasoned decisions, and so appeals are rare.

Form U-5 plays a significant role in the self-regulatory process. Finra routinely reviews terminations to determine whether the representative violated any laws. The form is designed to alert Finra to potential misconduct and, in turn, enable the SRO to investigate, sanction and deter misconduct by registered representatives. Investors may obtain information from the U-5 form on Finra's Web site.

Sensitive to Defamation

Still, "there is an inherent tension between being truthful [on the form] and ruining someone's career," Singer maintains. Cases his firm most often brings involve allegations of false or defamatory statements.

In a recent case handled by Singer Deutsch, a 31-year-old woman employed by a major broker-dealer and working with collateralized mortgages was terminated for what the U-5 described as "gross misconduct." She was said to have intentionally falsified an e-mail. As a result, she was unable to get another job in the industry, and was also denied a substantial bonus.

Singer Deutsch sought through arbitration the bonus, damages and removal from the record of the accusation on the U-5. The lawyers argued that the allegedly falsified e-mail was actually an amalgam of several e-mails that the woman combined for the purposes of recordkeeping. As such, the firm maintained, the changes to the e-mail were innocuous and amounted to no more than an innocent mistake.

The arbitration panel sided with the woman; she was awarded the full bonus plus punitive damages and elimination of the damaging comments on the form.

A U-5 arbitration case can be expensive and time consuming. Legal fees can go as high as $200,000, and resolution can take up to a year. Yet this process may be the only recourse for the employee. "The only way to get a record clear is to go through this process," notes Singer, adding, "Arbitrators have consistently shown that they want to be equitable."

(c) 2007 Securities Industry News and SourceMedia, Inc. All Rights Reserved.


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