Expungement of Form U5 Information

EXPUNGEMENT OF DEROGATORY FORM U5 TERMINATION INFORMATION

How can Associated Persons Obtain Expungment of Form U5 Information from Their FINRA Record?

The purpose of this article is to discuss the circumstances in which Associated Persons can obtain expungement of Form U5 information from their FINRA record. [For information on how an Associated Person can obtain expungement of a customer dispute from his or her record, see Mitchell & Associates, P.C.’s article entitled “Expungement of a FINRA Customer Dispute From a Broker’s CRD Report.” ]

I.          A Member Firm’s Duty to Report.

Under Article V, Section 3 of FINRA’s By-Laws, member firms must file a Form U5 within 30 days after the termination of an Associated Person’s registration with the member firm.  See FINRA Regulatory Notice 10-39.

Member firms also are required to file an amended Form U5 when the member firm becomes aware that a previously-filed Form U5 contains inaccurate or incomplete information.  Id. In either instance, the member firm is required to provide the effected Associated Person with a copy of the Form U5 simultaneously with filing the Form U5 with FINRA.  Id. FINRA explains the importance of such reporting requirements as follows:

Form U5 requires an appropriate signatory of a firm to verify the accuracy and completeness of the information contained in it prior to filing with FINRA.  It is imperative that firms file complete and accurate Forms U5 in a timely manner because the reported information is used by a number of constituencies for a variety of reasons.  For instance, FINRA uses the information to help identify and sanction individuals who violate FINRA rules and applicable federal statutes and regulations.  FINRA, other self-regulatory organizations and state regulatory and licensing authorities also use the information to make informed registration and licensing decisions.  Firms use the information to help them make informed employment decisions.  Further, investors use the Form U5 information that is displayed through BrokerCheck when considering whether to do business with a registered (or formerly registered) person.

Id.

Importantly, Section 3 of the Form U5 requires firms to indicate whether a termination was full, give a Reason for Termination (“Discharged,” “Other,” “Permitted to Resign,” “Deceased,” or “Voluntary”), and a Termination Explanation if the reason for termination was “Permitted to Resign,” “Discharged,” or “Other.”  FINRA requires member firms to “provide sufficient detail when responding to Form U5 questions such that a reasonable person may understand the circumstances that triggered the affirmative response.”  See FINRA Notice 10-39.  Further, a member firm “may not parse through the questions in a manner that would allow the firm to avoid responding affirmatively to a question.”  Id. With respect to Question 7F(1), “Did the individual voluntarily resign from your firm, or was the individual discharged or permitted to resign from your firm, after allegations were made that accused the individual of violating investment-related statutes, regulations, rules or industry standards of conduct?,” a particularly damaging question if a member firm provides an affirmative response, FINRA instructs member firms to construe the term “investment-related” expansively, and that the term does not relate only to securities.  Id.; see also Form U5 Instructions.

If a member firm does not provide Form U5 information compliant with the above guidelines, the member firm can be subject to the imposition of administrative and civil penalties. See FINRA Notice 10-39.

II.         A Form U5 was Filed In Relation to Your Prior Employment and It Contains Negative Information – What Do You Do?

If you are an Associated Person and your former firm filed a Form U5 containing negative information about the end of your employment relationship, such information will end up on the CRD system:

The CRD system is an online registration and licensing system that contains information used by the Securities and Exchange Commission (SEC), FINRA, other self-regulatory organizations (SROs) and state securities regulators to make licensing and registration decisions, among other things.  The CRD system contains administrative information (e.g., registration status with various regulators) and disclosure information (e.g., criminal charges and convictions) about securities firms and brokers.  In general, the information on the CRD system is submitted by registered securities firms and regulatory authorities in response to questions on the uniform registration forms.  These forms are designed to elicit and collect information that is relevant to regulators in connection with their licensing and enforcement activities.  Although public investors cannot access the CRD system, most of the information that is submitted to CRD via the uniform registration forms is made publicly available through FINRA BrokerCheck.

See John Nachmann, Expungement of Information From the Central Registration Depository in Intra-Industry Disputes, FINRA’s The Neutral Corner, Vol. 2 (2010).  The only option to try to obtain expungement of such information is to file an arbitration claim against your former firm with FINRA.  “FINRA can expunge information from the CRD system in intra-industry disputes only to the extent that it is directed to do so in an arbitration award.”  Id. If an arbitration award does not provide enough details or specificity, FINRA may not be able to expunge information in accordance with the arbitration panel’s findings and negative information will remain on an Associated Person’s CRD report unless an amended award is obtained.

FINRA Rule 12206 provides that “[n]o claim shall be eligible for submission to arbitration under the Code where six years have elapsed from the occurrence or event giving rise to the claim.  The panel will resolve any questions regarding the eligibility of a claim under this rule.”  Therefore, an Associated Person has six years from the filing of a Form U5 to bring an action for expungement.

III.        What Kind of Information Can Be Expunged?

An arbitration panel can award expungement relief only on the basis that the information the member firm provided on an Associated Person’s Form U5 is defamatory, misleading, inaccurate, or erroneous.  See NASD Notice 99-54.  The reason for these limit bases for expungement is because the “information on the CRD system has important investor protection implications, provided it is complete and accurate.”  Id.

It is to an Associated Person’s advantage to specifically allege in his or her Statement of Claim, which initiates the FINRA arbitration process, that the information on the Form U5 the Associated Person is seeking to have expunged is defamatory, as if the Associated Person is successful with his or her claim, and the arbitration award specifically states that the information to be expunged is defamatory, an Associated Person will not have to incur the additional time or expense to have the arbitration award confirmed by a court:

In accordance with the policies and procedures governing the operation of the CRD system, FINRA will expunge information from CRD based on a directive in an arbitration award rendered in an intra-industry dispute.  FINRA will expunge the information, without a court order, if the arbitration panel awards expungement relief based on the defamatory nature of the information contained in the CRD system, and explicitly states in the award that it is recommending expungement on that basis.  If, however, the arbitration panel does not state that it is awarding expungement relief based on the defamatory nature of the information, FINRA will not expunge the information unless the arbitration award is confirmed by a court of competent jurisdiction.

See FINRA’s The Neutral Corner, Vol. 2 (2010).  This is the one exception to the moratorium imposed by FINRA (NASD at the time) on January 19, 1999 of expunging information based solely on directions for FINRA to do so in an arbitration award.

In Arizona, in order for a plaintiff to prove a defamation claim, the plaintiff needs to prove the “publication [is] false and must bring the defamed person into disrepute, contempt, or ridicule, or must impeach plaintiff’s honesty, integrity, virtue, or reputation.”  Turner v. Devlin, 174 Ariz. 201, 203-04, 848 P.2d 286, 288-89 (1993); see also Godbehere v. Phoenix Newspapers, 162 Ariz. 335, 341, 783 P.2d 781, 787 (1989) (same); Dube v. Likins, 216 Ariz. 406, 418, 167 P.3d 93, 105 (Ct. App. 2007) (same).  While the elements of a defamation claim will vary by jurisdiction, the standard for a finding of defamation in a FINRA expungement action is more lenient than it would be in a state court action involving a defamation claim.  See NASD Notice 99-54 (“Arbitrators, however, are not required to state explicitly in the award that they have found that all of the elements required to satisfy a claim in defamation under governing law have been met.”).

IV.       Particular Challenges in Obtaining Expungement.

There are particular challenges for expunging employment information from a U5.  The first is that termination-related information can be in multiple places in an Associated Person’s record.  See FINRA’s The Neutral Corner, Vol. 2 (2010).    The second is that FINRA cannot expunge a Termination Explanation without providing language to replace the old Termination Explanation, nor can an arbitration panel delete the entire Form U5 or order a firm to withdraw a U5 and file a new one.  Id.  To help in addressing these challenges, the following is recommended:

“When the information is to be expunged from Section 3 [Full Termination] on Form U5, the arbitration award should identify the specific filing at issue and address both (1) the reason for termination and (2) the termination comment.  If the reason for termination is to remain or be changed to ‘Discharged,’ ‘Other’ or ‘Permitted to Resign,’ there must be a termination comment.  In these circumstances, the award should provide a termination comment if there is none or replacement language if the original termination comment is to be changed . . .

“When the information to be expunged is located in a disclosure question DRP [Disclosure Reporting Page], the arbitration award should set forth the information to be expunged but it should not reference a specific filing from which the information is to be removed;”

The arbitration award should address all references to information in the broker’s CRD record that should be expunged.

Id.  Therefore, in any Statement of Claim seeking expungement, the Statement of Claim should specifically identify whether the Associated Person is requesting a change in the reason for termination and what he or she would like the reason changed to, whether the Associated Person is requesting a change in the commentary regarding the termination and what he or she would like the commentary changed to, and whether the Associated Person is requesting an affirmative answer in a disclosure question, such as Question 7F(1), and its accompanying explanation be changed, and what he or she would like the reason changed to.  This level of specificity should assist the arbitration panel, should they find the Associated Person should be awarded expungement, in drafting an award that will accomplish the requested results.

V.        Avoiding the Need to Bring a Claim for Expungement.

In light of the above mandatory reporting rules, if you are an Associated Person and are separating from a member firm for any reason, the most prudent thing to do would be to inquire of the firm’s intentions with respect to the forthcoming Form U5 and attempt to address any inaccuracies with the member firm prior to your departure.  See http://news.efinancialcareers.com/News_ITEM/newsItemId-24605.  Being proactive and assertive on your own behalf prior to your departure, even if the departure was not your decision, can go a long way to preventing negative information that can affect future employment from ever showing up on your CRD report.

VI.       Conclusion.

If you are a registered representative interested in pursuing an expungment action against your former FINRA member firm, or if you have a question about a Form U5 filing made about you, please contact Robert D. Mitchell at robertmitchell@mitchell-attorneys.com, or at (602) 468-1411.

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