Form U-5 & Expungements

U-5 Summary

The Financial Industry Regulatory Authority (FINRA) establishes rules and regulations for broker-dealer member. This includes termination of employees. Within 30 days of terminating an employee, you are required to complete and file a Form U5. You are required to disclose the reason for termination. A completed U5 becomes part of the employees Central Registration Depository (CRD). Due to the nature of this form, many disputes arise between former employees and employers. The form is used for a multitude of reasons, including: enforcement purposes, licensing decisions, employment decisions, and made public via BrokerCheck for assessment purposes. 
We highly recommend completing the form with an attorney and your compliance professional to reduce chances of legal action.Defamation claims are most common due to disputes over the language contained in the Form U5. The contents of the form can directly impact a person’s future employment opportunities. A former employee may ask FINRA to expunge the information from their CRD records, whether the information is true or not. You  may decide to provide limited information as a way to avoid a defamation lawsuit. FINRA requires member firms to share negative information as it it relates to misbehavior.

Case Example

In a Financial Industry Regulatory Authority (“FINRA”) Arbitration Statement of Claim filed in October 2017, Claimant Michael Fasciglione sought the expungement of three separate customer occurrences (identified as #1433384; #1242299; and #1380363) from his Central Registration Depository record (“CRD”) and $1 in compensatory damages. In the Matter of the FINRA Arbitration Between Michael Fasciglione vs. First Montauk Securities Corp., Josephthal & Co., Inc., and National Securities Corporation (FINRA Arbitration 17-02925).

In recommending the expungement of occurrence #1433384, the Arbitrator found pursuant to Rule 2080 that the claim, allegation, or information is false. The Arbitrator offered, in part, this rationale:

While Claimant was employed by First Montauk Securities Corp. he was contacted by a sophisticated investor client seeking a Sec. 1031 exchange. First Montauk Securities Corp. had a list of pre-approved Sec. 1031 exchange companies. Claimant selected one from that list and sent the company contact information to the client. Since Claimant was not registered in Florida he recommended that the client connect another First Montauk Securities Corp. broker who was registered there. Outside of any involvement, recommendation or solicitation from Claimant, the Sec. 1031 company provided the client with multiple properties from which to select for the exchange. The client selected three such properties and proceeded to visit them and to evaluate their respective financial conditions. The client selected one such property, which was in Texas, and performed due diligence including visiting the property and evaluating its financial merits. The Claimant was neither involved in the selection of which properties to propose nor in the decision of which property to purchase. Claimant did not receive a commission or a referral fee for introducing the client to the Sec. 1031 company or to the Florida-licensed broker of record.

Thereafter the client filed a claim against everyone directly or indirectly involved, including Claimant, alleging “fraud, deceit, breach of fiduciary duty, breach of contract and negligence.” While some or all of these claims may indeed have merit against the owners of the Texas property and possibly even against the Sec. 1031 exchange company, none have merit against Claimant. Claimant had no knowledge, participation in or influence on the properties selected by the Sec. 1031 exchange company or the selection of the Texas property by the client, nor was he even the broker of record on the transaction.

The client’s complaint eventually went to mediation in which, while Claimant was represented by counsel, neither he nor his counsel was actively involved therein and the Claimant was not required to participate in any settlement.

Occurrence #1242299 

In recommending the expungement of occurrence  #1242299, the Arbitrator found pursuant to Rule 2080 that the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds. The Arbitrator offered, in part, this rationale:

Before Claimant’s employment with Josephthal, one of its advisors, who Claimant eventually came to supervise, gained a certain husband and wife as clients. Prior to the clients’ complaint of “churning” and “taking excessive risk” in their account, they became clients of the Claimant. Significantly, however, all of the events complained about occurred before Claimant became supervisor of the broker of record and well before he gained this couple as clients. Josephthal evaluated the claims and found no wrongdoing on the part of the broker of record or the Claimant and quickly and summarily denied the claims.

Inasmuch as Claimant was neither the broker of record, nor that broker’s supervisor at that time, nor did he make the actual transactions in the account, pursuant to FINRA Rule 2080(b)(1)(B) the Claimant was not involved in the investment-related sales practice violations, if there were any, and the claim as reported on Claimant’s Snapshot Report and BrokerCheck Report is subject to expungement.

Occurrence #1380363

In recommending the expungement of occurrence #1380363, the Arbitrator found pursuant to Rule 2080 that the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds. The Arbitrator offered, in part, this rationale:

Similar in certain respects to occurrence #1242299, the Claimant here was not the broker of record (‘the broker”). Indeed, he was not even the broker’s supervisor.

Claimant was a long-time friend of the broker. During the course of a 30-year relationship with a certain client, the broker became sick and eventually asked the Claimant for help in managing the account. Although the account was a nondiscretionary account, the client’s claims were for churning and unsuitability and these claims were denied by the firm and closed with no further action necessary.

Claimant was not involved in the investment-related alleged sales practice violations. He did not make any of the trades nor was he involved in any of the other transactions complained of. He was neither the broker of record nor the broker’s supervisor and for these reasons the claim as reported on Claimant’s Snapshot Report and BrokerCheck Report is subject to expungement pursuant to FINRA Rule 2080(b)(1)(B).

 

Analysis

All of these customer complaints were required to be disclosed on Mr. Fasciglione’s U4 because he was named or referenced as a responsible party.  As the arbitrator correctly determined, these disclosures should be expunged as they do not serve the interests of the investing public by being a part of the broker’s record and are clearly erroneous as Mr. Fasciglione was not involved in any of the alleged conduct. These kinds of disclosures, unless expunged, can harm a broker and their ability to add and retain clients.

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