Defamation is the publication of false and derogatory information about another person. For Financial Advisors or other FINRA registered professionals, this can occur when an employer bank or brokerage firm files a termination FINRA Form U-5. A defamatory Form U5 - whether caused by the employer's wrongful affirmation in paragraph 7f1 or an inaccurate termination DRP narrative - can effectively kill your career as a registered representative or FA. However, FINRA has a specific cause of action called "Defamation on Form U-5" that a wronged FA or licensed rep can bring against his or her former firm to have the
U-5 expunged and with the opportunity to recover pecuniary damages, like lost wages incurred as a direct and proximate cause of the defamatory U-5.
When an FA or any "FINRA Associated Person" resigns or is terminated from employment with a FINRA member firm, for example, Merrill Lynch, the firm is required to file with the Central Records Depository a FINRA Form U-5. The losing firm must fill out certain "yes" or "no" questions and, in some cases, state in narrative form the reason for the termination or resignation. They are under an obligation to provide complete and accurate information on the U-5 that will allow the public, and including a gaining firm, to understand the reason for the termination or resignation. When that information is shown to be false or incomplete and derogatory, a FINRA arbitration panel or sole arbitrator may order the CRD to expunge if from the public record. No future employer or the public will be able to review it.
A defamatory Form U-5 can be a financial industry career showstopper. Although a gaining firm manager may badly want to hire you as a Financial Advisor or Registered Rep, no compliance officer is going to approve or recommend approval for employment in any but the most exceptional of circumstances. The liability of hiring an FA accused on Form U-5 of somehow violating FINRA and/or investment regulations or standards of conduct is typically viewed as not worth the risk. As a result, advisors are essentially blackballed by the financial industry. To add insult to injury, many FA's and registered reps who find themselves unemployable due to a defamatory Form U-5, are jolted further when they apply for unemployment benefits only to hear that the firm is contesting their eligibility for temporary assistance.
Often enough, the defamatory information on a Form U-5 includes allegations that the Financial Advisor or registered person either violated investment-related rules, regulations, or standards of conduct prior to his or her resignation or employment termination or was accused of such a violation. Usually, allegations of such misconduct start out with a customer complaint or a request by management that calls for an internal investigation. Depending on the results, termination or 'voluntary resignation' may ensue, prompting the U-5 filing. But investigations are conducted by investigators, not all of whom have the same level of training or experience. Sometimes they get it wrong. That is, their investigation is negligent and the conclusions that make it to the Form U-5 false and derogatory (i.e., defamatory).
In some cases, however, it's not a case of negligence on the part of global investigations or management, but intentionally attempting to derail an FA's future in the industry. Although these cases are rare, they do occur for a variety of motivations, from racial animus, sexual discrimination, for personal reasons, or unethical institutional norms. If this is the case, then an argument for punitive damages arises. Punitive damages are awarded by arbitrators in order to stop the firm from repeating the unethical behavior (i.e., intentionally defaming a FINRA Associated Person) or to deter other firms from engaging in similar behavior.
On top of everything else, unexpected termination of a Financial Advisor's employment (or premature resignation by the FA) can cause the balance on a "payable note" or "recruitment bonus" to become immediately due. As FA's know, these loans can be substantial and are offered as an incentive to join the lending firm. They also help defray the loss of commission income during the FA's transition between firms when his or her immediate mission is to transfer as many of the losing firm's clients and their accounts as possible.
Firms are highly likely to pursue repayment of the balance due if an FA is fired and, like the FA, they are required to bring any claim for the balance in FINRA arbitration.
We have successfully assisted Financial Advisors in avoiding payment of the balance due on these notes - either entirely or in a substantial amount - as a result of arbitration or negotiating with the lending brokerage firm/employer. If you are an FA in any state and your past employer is seeking action to recover the balance due on a payable note, then we can help.
Will my ex-employer brokerage firm or bank change my U-5 if I show them that it's defamatory?
Short Answer: Most probably, no.
Your losing firm is not likely to change a FINRA Form U-5 once it is reported. First, your chances of convincing them that what they have written is defamatory are slim to none. Unless there is some intentional and malicious motive, they will have convinced themselves after an investigation that what they have reported about you on the Form U-5 is truthful, accurate, and complete. Even if compliance or the responsible office recognizes a deficiency, amending their initial inaccurate report will raise red flags at FINRA and the CRD, possibly leading to FINRA inquiries as to why the first U-5 was not filed with accurate information. There's just not much incentive in favor of willingly amending it once filed. They would rather fight it out in arbitration, even if that ultimately results in an arbitrator decision ordering the FINRA CRD to expunge the defamatory U-5.