For many financial professionals, disclosures can be particularly damaging when a brokerage or advisory firm reports negative information on a Form U5 that becomes part of the individual’s record in the Central Registration Depository (“CRD”). While certain disclosures are required by regulatory rules, they can have significant and lasting consequences for a registered representative’s career, future employment opportunities, client relationships, and professional reputation. Given that this information is public and is kept on file for years, financial professionals should carefully evaluate whether expungement may be available to address disclosures that are inaccurate, misleading, defamatory, or otherwise unwarranted.
What is a Form U-5
A Form U-5 is also known as the Uniform Termination Notice for Securities Industry Registration is filed when an individual leaves a firm for any reason[1]. This can be for any termination: full, partial, or an amendment. The form discloses the reason for termination and may include allegations involving customer complaints, policy violations, regulatory concerns, or other reportable information, which may be negative or damaging for the registered representative. The Form U-5 must be submitted within 30 days of the individual’s employment date by the investment adviser firm.
What kind of information may appear on your Form U-5?
- Civil judicial actions;
- Criminal matters
- Customer disputes and complaints
- Employment terminations
- Internal reviews or investigations of an associated person
- Personal bankruptcy
What is an expungement?
Expungements are typically the process of removing damaging disclosure information from a registered representatives U-5 or CRD. FINRA allows for expungements of the information that appears on the CRD, relating to customer dispute information, under rules 2080, 12805, 13805 .[2] These rules allow for expungements through arbitration when an arbitration panel determines (1) information is factually impossible or clearly erroneous; (2) the representative was not involved; or (3) the allegations are false. However, expungements are not limited to the FINRA arbitration process. In certain circumstances individuals may seek relief through alternative avenues, including obtaining a court order directing the expungement of eligible information from the CRD system. It is important to understand the types of information that may appear on a registered representative’s record and whether expungement may be available to address certain disclosures.
Why expungements are necessary:
As discussed above, a variety of events and disclosures may be reportable when a registered representative’s employment with a firm ends. However, many individuals are unaware of the long-term impact these disclosures can have on future employment opportunities, client relationships, and their overall professional reputation. While FINRA views expungement as an extraordinary remedy that is available only under limited and specific circumstances, it can be a valuable tool for addressing inaccurate, misleading, or unwarranted disclosures that may not be necessary to disclose.
Key changes to Expungements under FINRA rules:
Recent amendments to FINRA’s expungement rules have introduced some significant safeguards. Under these changes, FINRA now imposes strict deadlines for filing straight-in expungement requests.[3] “
Specifically, FINRA will now deny an expungement request filed more than two (2) years after the conclusion of the customer arbitration or civil litigation associated with the customer dispute information, or more than three (3) years after the customer complaint is initially reported in the CRD if the customer complaint did not evolve into a customer arbitration or civil litigation.
Additionally, for any arbitration proceeding in which an expungement is requested, FINRA now requires the registered representative to appear in person or by video conference at the expungement hearing. The amendments also strengthen customer participation rights by facilitating attendance and involvement throughout the hearing process either by telephone, video conference or in person.
One of the most notable changes is that expungement requests are now generally heard by a three-person arbitration panel selected from FINRA’s Special Arbitrator Roster, replacing the prior system in which a single arbitrator often decided expungement requests.
Collectively, these reforms reflect FINRA’s continued efforts to ensure that expungement remains an extraordinary remedy reserved for appropriate circumstances
What can’t be expunged?
Although FINRA provides a mechanism for expunging certain information from the CRD, not all information maintained in the CRD is eligible for expungement. Information such as registration history, qualification examination records, employment history, and the names of firms with which a registered representative has been associated, generally are not subject to expungement through FINRA’s expungement processes. As a result, registered representatives should carefully assess the nature of the information at issue when determining whether an expungement is available.
Disclosures maintained in the CRD can have significant and lasting effects on a financial professional’s career, reputation and future opportunities. While expungements are an extraordinary remedy that is available in certain circumstances, it can provide meaningful relief when inaccurate, misleading or unwarranted customer dispute information or previously dismissed civil or criminal judgments appear on a registered representatives record. Understanding what information may be disclosed, what types of information are eligible for expungement, and the procedures required to obtain relief is essential for protecting one’s professional standing. Given the complexity of the expungement process, it is imperative that individuals work with experienced legal counsel to evaluate their options and determine the most appropriate course of action.
[1]https://www.finra.org/registration-exams-ce/broker-dealers/registration-forms/form-u5
[2] https://www.finra.org/rules-guidance/guidance/faqs/expungement-and-finra-rule-2080-faqs
[3] https://www.finra.org/rules-guidance/key-topics/expungement-of-dispute-information
Author: Amandeep Kalhar, Attorney. Edited by Dharmi Mehta, Junior Partner, Jacko Law Group, PC.
JLG works extensively with investment advisers, broker-dealers, investment companies, private equity and hedge funds, banks and corporate clients on securities and corporate counsel matters. For more information, please visit https://www.jackolg.com/.
The information contained in this article may contain information that is confidential and/or protected by the attorney-client privilege and attorney work product doctrine. This email is not intended for transmission to, or receipt by, any unauthorized persons. Inadvertent disclosure of the contents of this article to unintended recipients is not intended to and does not constitute a waiver of attorney-client privilege or attorney work product protections.
The Risk Management Tip is published solely based off the interests and relationship between the clients and friends of the Jacko Law Group P.C. (“JLG”) and in no way be construed as legal advice. The opinions shared in the publication reflect those of the authors, and not necessarily the views of JLG. For more specific information or recent industry developments or particular situations, you should seek legal opinion or counsel.
You hereby are notified that any review, dissemination or copying of this message and its attachments, if any, is strictly prohibited. These materials may be considered ATTORNEY ADVERTISING in some jurisdictions.
