Form U4

FINRA ENDS MANDATORY ARBITRATION FOR CLAIMS OF SEXUAL HARASSMENT OR SEXUAL ASSAULT

July 25, 2022 | Herskovits, PLLC

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On July 15, 2022, FINRA filed Regulatory Notice 22-15 and announced the amendment of its Code of Arbitration for Industry Disputes to conform to the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021, Pub. L. No. 117-90, 136 Stat. 26 (2022). The amendments permit person with claims of sexual assault or sexual harassment to pursue those claims in court irrespective of any agreements otherwise mandating arbitration.

Background

FINRA members historically forced employees to arbitrate claims of sexual harassment or assault by use of agreements containing pre-dispute arbitration clauses. The pre-dispute arbitration clauses were typically contained within a Form U4, employment agreements or provisions within an employee manual that the employee was bound by.

FINRA RELEASES PAPER REGARDING EXPUNGEMENT OF CUSTOMER COMPLAINTS

May 11, 2022 | Herskovits, PLLC

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On May 6, 2022, FINRA released a “Discussion Paper – Expungement of Customer Dispute Information” (the “Discussion Paper”) to address what FINRA clearly sees as problems with the current system for expunging customer complains. Let’s be clear from the outset, FINRA is openly hostile to the expungement of customer complaint information. FINRA is particularly hostile to what they describe as “straight-in” expungement arbitrations where the financial advisor seeks expungement by naming their firm as the respondent (typically after a customer arbitration has settled).

As many practitioners know, FINRA passed an amendment, effective September 14, 2020, establishing a minimum filing fee for expungement arbitrations. The Discussion Paper touts the success of this amendment in reducing the number of straight-in expungement actions by 37% between 2019 and 2020. Thus, FINRA makes it clear that its goal is reduction of expungement claims rather than making sure the claims have merit.

The tone of the Discussion Paper starts off somewhat defensive as FINRA makes sure to let the public know how few expungements are actually awarded every year. Between January 2016 and December 2021, approximately 8 percent of financial advisors registered with FINRA had a customer dispute disclosure on their record and only 1 in 10 had customer dispute information expunged during that time period. If expungement of customer dispute information is so rare, it is hard to understand why FINRA has as they put it, “engaged in longstanding efforts with NASAA and state securities regulators to explore a redesign of the current expungement process.” I recently blogged about the Alabama Securities Commission’s (“ASC”) intervention into an expungement award confirmation proceeding and the ASC’s very dim view of the “straight-in” expungement process. In light of the intervention and then the subsequent release of this Discussion Paper, it seems likely that more state regulators than just Alabama are unhappy with the current expungement system.

FORM U4 CRIMINAL HISTORY DISCLOSURES

January 21, 2022 | Herskovits, PLLC

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Maybe you were caught using a fake ID when you were in college or maybe you got into a heated exchange after a fender bender. Each of these could lead to a variety of criminal charges that vary by state and by prosecutorial discretion. Criminal charges have obvious negative consequences. Many people however – even criminal defense attorneys – ignore the more subtle issue of whether or not a registered representative will have to disclose these indiscretions on FINRA’s Form U4 and publicly display them on BrokerCheck.

What Needs to be Disclosed on Form U4?

The Form U4 requires registered representatives to disclose if they have ever been “convicted of or pled guilty or nolo contendere (“no contest”) in a domestic, foreign, or military court to any felony” or if they have been “charged with any felony.” The Form U4 also requires the disclosure of any conviction, guilty plea or nolo contendere plea for any “misdemeanor involving: investments or an investment-related business or any fraud, false statements or omissions, wrongful taking of property, bribery, perjury, forgery, counterfeiting, extortion, or a conspiracy to commit any of these offenses” or if the registered representative has ever been charged with such a misdemeanor.

FINRA ARBITRATION AWARD DESCRIBES MERRILL LYNCH’S “RECKLESS DISREGARD FOR THE TRUTH” IN A FORM U5 FILING

May 6, 2021 | Herskovits, PLLC

In September of 2018, Merrill Lynch terminated the Claimant in this arbitration for allegedly opening up a Bank of America bank account for a customer without authorization. In 2020, the Claimant brought an arbitration against Merrill Lynch seeking expungement of the alleged defamatory reason for termination and also sought $50,000 in compensatory damages. The FINRA arbitration award is viewable here.

The arbitration was conducted under FINRA’s simplified rules before a single public arbitrator and the Claimant represented herself without an attorney. Merrill Lynch was represented by the law firm Seyfarth Shaw LLP.

In her findings, the single arbitrator seemed particularly concerned that Merrill Lynch failed to even speak with the customer about the allegations in dispute. Merrill Lynch also failed to have the customer sign an affidavit supporting the allegations. The client in question was known to be suffering from memory problems so significant that Merrill Lynch terminated her as a brokerage client despite an account balance in excess of $500,000. The client had previously complained about unauthorized trading in her account by her primary advisor.

Herskovits PLLC Proves Form U5 Defamation and is Awarded Attorneys’ Fees for Our Client

November 24, 2020 | Herskovits, PLLC

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On November 19, 2020, FINRA published a noteworthy arbitration award for a Herskovits PLLC client in FINRA Arbitration No. 20-01054. This case has garnered significant attention in the press due to the fact that Wells Fargo was ordered to pay our client’s attorneys’ fees. Stories about the case have been reported in AdvisorHub, InvestmentNews and ThinkAdvisor.

On February 18, 2020, Wells Fargo terminated the FA and inserted the following allegation on the Form U5:

“WF Bank, N.A., registered banker was discharged by the bank after a bank investigation reviewed complaints received by AMIG from two bank customers alleging the customers were enrolled in renter’s insurance policies for which the banker received referral sales credit without the customers’ authorization. The registered banker denied the customers’ allegations. The activity was not related to the securities business of WFCS.”

FINRA SEEKS TO LIMIT EXPUNGEMENT REQUESTS WITH PROPOSED RULE

September 27, 2020 | Herskovits, PLLC

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On September 22, 2020, FINRA submitted a proposed rule change to the SEC. The proposed rule furthers FINRAs assault on the expungement process by imposing stringent requirements on expungement requests filed during a customer arbitration by or on behalf of the associated person (“on-behalf-of request”) or filed by a registered representative separate from a customer arbitration (“straight-in request”). The proposed rule also (a) establishes a roster of arbitrators with enhanced training and experience, from which a panel of 3 arbitrators would decide straight-in requests; and (b) codifies and updates the Notice to Arbitrators and Parties on Expanded Expungement Guidance.

Here are some of the key takeaways from the proposed rule change:

Denial of FINRA Forum

CALIFORNIA ENDS ABSOLUTE IMMUNITY FOR FORM U5 DEFAMATION CLAIMS

May 2, 2020 | Herskovits, PLLC

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On April 21, 2020, California’s Court of Appeal, Fourth Appellate District created a significant carve-out to the absolute immunity standard previously applicable to Form U5 defamation claims in California. The full opinion in Tilkey v. Allstate Insurance Co., Super. Ct. No. 37-2016-00015545-CU-OE-CTL (2020) is available here. This case significantly changes the landscape for Form U5 defamation claim unless California’s highest court intervenes. As a result of Allstate’s defamation, the trial court awarded Tilkey $2,663,137 in compensatory damages and $15,978,822 in punitive damages.

Background

Before jumping in to the facts of the case, some background on Form U5 defamation claims might be helpful. Broker-dealers are required to file a Form U5 whenever an employee’s registration is terminated. The Form U5 requires the firm to provide a narrative explanation of the termination if the employee was discharged or permitted to resign. When it comes to the narrative explanation, professionals in the financial services industry frequently complain that employers “play games” by providing extraneous and gratuitous remarks or, worse yet, offering an entirely false explanation for the termination. The consequences flowing from negative Form U5 disclosure information are severe. In addition to reputational harm, FINRA will start a costly investigation and potential employers will shy away from a prospective employee with negative information on CRD.

FINRA DROPS THE STATUTORY DISQUALIFICATION HAMMER

December 17, 2019 | Herskovits, PLLC

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On December 16, 2019, FINRA released the AWC in Matter No. 2018060843801 (In re Molteni) [click here to read the AWC]. At first blush, the AWC seems to concern a garden variety violation in which the FA failed to amend his Form U4 to disclose two federal tax liens. This doesn’t seem to be the violation of the century, right? Even FINRA’s Sanction Guidelines suggest a regulatory slap on the wrist of a modest fine and 10 day suspension.

So here is where things get interesting. FINRA more or less sanctioned Molteni in accordance with the Sanction Guidelines. They hit him with a $5,000 fine and a 3 month suspension. However, FINRA also found that he “willfully” failed to disclose the federal tax liens. In the world of FINRA regulation, the word “willful” carries an awful lot of weight.

What does it mean to act “willfully”?

UBS IS SLAMMED FOR FORM U5 DEFAMATION: QUALIFIED IMMUNITY PREVAILS

December 13, 2019 | Herskovits, PLLC

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On December 11, 2019, a Chicago-based FINRA arbitration panel body-slammed UBS in a Form U5 defamation case (FINRA Case No. 18-02179 – Munizzi vs. UBS Financial Services Inc.). UBS will need to cough up compensatory damages of $3,149,656, punitive damages of $7.5 million, and almost $500,000 in attorneys’ fees. The bean counters in Zurich can’t be happy. This case should serve as a warning to brokerage firms who play games with Form U5 disclosures.

The issues surrounding Form U5 disclosures are well known. Firms are required to state a reason for an individual’s termination as either “discharged,” “other,’ permitted to resign,” “deceased,” or voluntary.” If the reason for termination is designated as discharged, permitted to resign or other, the firm is required to provide a written explanation. This is where things get funky, particularly where the individual contests the explanation offered-up by the firm.

Lawyers tend to squabble over whether a firm can be successfully sued for defamatory statements on a registration termination form (Form U5). Brokerage firm’s argue that FINRA requires them to provide timely, complete and accurate information on Form U5 concerning the individual’s termination. Firm’s will often cite to FINRA Regulatory Notice 10-39 [a copy can be viewed here] to support this proposition. Thus, many firms will claim to enjoy “absolute immunity” for statements made on a Form U5 and rely upon Rosenberg v. Metlife, 8 N.Y.3d 359 (2007) (where New York’s highest court ruled that defamatory statements on a Form U5 are subject to an absolute privilege). However, as set forth in the tables below, New York’s position on Form U5 immunity is clearly the minority view, since most states that have considered this issue provide brokerage firm’s with only qualified immunity (meaning, immunity for statements made in “good faith”):

MAJORITY POSITION: QUALIFIED IMMUNITY
State	Case
Arizona	Wietecha v. Ameritas Life Ins. Corp., No. CIV 05-0324-PHX-SMM, 2006 WL 2772838 (D. Ariz. Sep. 27, 2006)
Connecticut	Dickinson v. Merrill Lynch, 431 F. Supp. 2d 247 (D. Conn. 2006)
Florida	Smith-Johnson v. Thrivent, No. 803CV2551T30EAJ, 2005 WL 1705471 (M.D. Fla. July 20, 2005)
Illinois	Bavarati v. Josephthal, Lyon & Ross, 28 F.3d 704 (7^th Cir. 1994)
Michigan	Andrews v. Prudential, 160 F. 3d 304 (6^th Cir. 1998)
Oklahoma	Prudential Sec. Inc. v. Dalton, 929 F. Supp. 1411 (1996)
Tennessee	Glennon v. Dean Witter, 83 F.3d 132 (6^th Cir. 1996)
Texas	In re Wakefield, 293 B.R. 372 (N.D. Tex. 2003)

In addition, a number of states have enacted Section 507 of the Uniform Securities Act, which specifically provides for qualified immunity (the firm can be liable for defamation if the firm knew or should have known that the statement was false, or acted in reckless disregard of the statement’s truth or falsity.

MAJORITY POSITION: QUALIFIED IMMUNITY
State	Statute
Hawaii	HAW. REV. STAT. ANN. § 485A-507 (2006)
Idaho	IDAHO CODE ANN. § 30-14-507 (2004)
Kansas	KAN. STAT. ANN. § 17-21a507 (2005)
Maine	ME. REV. STAT. ANN. 32, § 16507 (2005)
Minnesota	MINN. STAT. ANN. § 80A.74 (2007)
Missouri	MO. REV. STAT. § 409.5-507 (2003)
Oklahoma	OKLA. STAT. ANN. 71, § 1-507 (2004)
South Carolina	S.C. CODE ANN. § 35-1-507 (2006)
South Dakota	S.D. CODIFIED LAWS § 47-31B-507 (2002)
U.S. Virgin Islands	V.I. CODE ANN. 9, § 657 (2004)
Vermont	VT. STAT. ANN. 9, § 5507 (2006)

In addition, the regulatory community has historically supported the proposition of qualified immunity instead of absolute immunity. In 1997, FINRA (then NASD) even proposed a rule specifically provided only qualified immunity for Form U5 disclosure [click here to read the Notice to Members]. Additionally, in 1996, then SEC Commissioner, Isaac C. Hunt, Jr., forcefully advocated for qualified immunity [click here to read his remarks].

Herskovits PLLC has a nationwide practice representing individuals in the securities industry in employment and compensation disputes, including Form U5 defamation cases and Form U5 reformation cases. Feel free to view our practice area page or call us at 212-897-5410.