The financial services industry is built on trust and relationships. Both private and institutional investors place significant monetary sums in the hands of their brokers, financial advisors, and other professionals.
Which is why, at first glance, it might seem like a good thing for the Financial Industry Regulatory Authority (FINRA) to make its online BrokerCheck system open to the public. FINRA is an independent, non-profit organization responsible for regulating the securities industry, and the BrokerCheck service is a free tool that allows anyone to research the background and experience of financial brokers, advisors, and firms.
Previously, the information available on BrokerCheck could only be accessed by other FINRA member firms. Now, however, in a bid to protect investors from “bad actors,” FINRA has made this information available to anyone with an internet connection.
The Problem: U5 Status Also Listed on BrokerCheck
Where the public nature of BrokerCheck potentially becomes problematic, however, is that it provides information about an individual broker’s or financial advisor’s U5 history. The U5 is a form that must be filed whenever a registered representative – someone licensed to sell securities – leaves a FINRA member brokerage or firm. Regardless of whether the separation is voluntary or involuntary, a U5 must be filed with FINRA, and that information is then made public via the individual’s BrokerCheck file.
In the case of a termination, the brokerage is required to list the reason for the separation on the U5, as well as whether or not the individual was “the subject of an investigation or proceeding” at the time of the termination. And, as noted by the New York Times, “a negative comment on a U5 is a scorching mark that can make it almost impossible to find another job in the banking field.”
A registered representative’s U5 record is also very difficult to change. It requires a FINRA arbitration proceeding which can be a difficult, burdensome, and expensive undertaking. Accordingly, a U5 is essentially part of a financial services professional’s “permanent record” – which can now be searched on a public database thanks to BrokerCheck.
Malicious U5 Comments Can Ruin Careers
While making U5 filings public on BrokerCheck may be a good thing in terms of weeding out bad apples, this presupposes that all firms and brokerages act responsibly when filling out the form. Sometimes, however, employers use a U5 form to retaliate against a departing employee.
Retaliation can happen for any number of reasons. For example, in the wake of its fake account scandal, Wells Fargo was accused of retaliating against whistleblowers by firing them and including negative comments on their U5 filings. The action was so egregious it prompted questions from the U.S. Senate Banking Committee as to the motivation of Wells Fargo managers in completing negative U5s. There was no doubt in the minds of many of the affected employees that this was retaliation, pure and simple, and it potentially ended the careers of many who had done nothing wrong.
BrokerCheck Could Extend the Harm of Malicious U5 Filing
When information regarding a registered representative’s U5 status was only available to other FINRA member firms and brokerages, the career-killing potential of negative comments was bad enough. Whether accurate or not, a questionable U5 could effectively prevent someone from ever working in the financial services industry again. The only possibility for some would be to change fields and seek employment elsewhere.
Now that BrokerCheck has put that information online for anyone to access, however, a negative U5 filing can haunt someone’s job prospects forever, no matter where they go. While employers in other industries generally only provide neutral references, i.e., dates of employment and job titles, BrokerCheck allows anyone from a potential employer to curious friends and acquaintances to look up individuals and see why they left their last positions in finance.
Some might see this as fine if the negative U5 was deserved. But what if the filing was retaliatory or malicious? Such a public filing now has the potential to ruin an innocent employee’s career in financial services as well as his or her future job prospects in any field.
The Importance of Negotiating a Separation
The now public nature of BrokerCheck means that financial services professionals cannot take passive attitudes towards the process of their separations. While it might be one of the most difficult points of their careers, it is imperative that they ensure that the basis surrounding their departure is accurately reflected on their U5.
Given what is involved in expunging a U5, the best time to ensure the accuracy of its contents is before a record is filed by a former employer. Employees have the right to know what will appear on their U5s and can have input into that process. Therefore, it is critical to a departing employee to document all negotiations and meetings on the subject, in case the filed form differs from what the parties agreed to.
Financial services professionals must protect their careers, both within the industry and beyond. Now that BrokerCheck has made U5 filings public, attention to the separation process is even more important.