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Any time a rep exists at a firm, whether the reason involves an involuntary discharge, a voluntary resignation, or a rep being permitted to resign, firms and broker-dealers are required by the Financial Industry Regulatory Authority (FINRA) to file a Uniform Termination Notice for Securities Industry Registration (Form U5). This flags regulators to investigate the case and determine whether further action is required and if any regulations or rules were violated.
It should come as no surprise that advisors frequently contest the information provided by their former broker-dealers on their Form U5, especially in tense or forced exits. More frequently than not, firms weaponize Forms U5 against reps in efforts to boost retention rates and keep customer assets. If there is one thing we’ve learned over the years, it’s that wealth managers and financial advisors receive very little to no protection from unfounded accusations and damaging rumors. Businesses can essentially say and do whatever they want, without fear of retribution.
FINRA Rule 4111
Meanwhile, severe laws and regulations, like FINRA’s latest Rule 4111, provide bureaucrats with the statistical satisfaction of simultaneously eliminating thousands of people whom they perceive to be bad actors. Broker-dealers have already started terminating “bad” advisors en masse to avoid FINRA’s expensive and restrictive requirements.
Firms and broker-dealers are now unwilling to hire any advisor with a “history” of misconduct or a Form U5 that lists anything other than a “voluntary” termination. But advisors have started to fight back. Today more than ever, advisors are bringing libel actions against wealth-management firms based on the assertions made in their Forms U5. These types of cases are frequently filed alongside lawsuits against the firm, alleging contract breaches or employment discrimination.
Advisors are facing a double-edged sword.
As defamation claims in the financial industry continue to rise, and more and more advisors are terminated, reps must consider how they can protect their livelihood and continue to have a successful career in the industry. Advisors have little to no control over what’s written about the circumstances surrounding their terminations. Even if it’s untrue or defamatory, advisors are frequently forced to live with negative disclosure language on their public records, for years.
According to sources across the industry, the Form U5 is just one of many incentives enticing brokers to renounce their securities licenses altogether and join the RIA sector. If you’re a FINRA-registered representative, given all of FINRA’s recent antics, now might be the ideal time to take that action. Fortunately, AdvisorLaw has a wealth of knowledge to help brokers and reps complete their FINRA departure. For registered investment advisor (RIA) firms, our team of specialists offers specialized RIA setup and registration, as well as continuing compliance services.
FINRA always finds a way to tighten regulations, increase fees, and expand monitoring. Registered reps should take these recent events seriously, and they should be aware that FINRA has no plans to make things simpler or less expensive.