The first stop for any employment claim involving most financial services companies is arbitration governed by the Financial Industry Regulatory Authority (“FINRA”), which has its own procedures.
Mandatory arbitration controls all employment disputes between FINRA member businesses and their employees who are registered with FINRA. FINRA is an independent regulatory agency that protects investors by ensuring that its member firms operate fairly and in accordance with federal securities laws and regulations. FINRA has established an arbitration procedure for settling employment-related disputes involving its member firms and their employees.
FINRA’s Central Registration Depository (“CRD”), an online database, contains information about member firms’ employees, including their employment history, customer complaints, and findings of illegal activity. When a FINRA member firm hires an employee who will be involved in the banking or securities business, the firm must register that individual by submitting a Form U4 to FINRA. Section 15A of that form statement requires Registered Persons to arbitrate all disputes which may arise with their employers.
FINRA firms must also file a Uniform Termination Notice for Securities Industry Registration, commonly called a Form U5, within 30 days after terminating a Registered Person. The U5 includes information about the reasons for the termination, in sufficient detail to enable a reasonable person to understand the circumstances that triggered that action.
Prospective employers frequently check information on U5s when making hiring decisions so statements made on those forms can severely impair applicants’ ability to obtain employment in the financial services industry. In addition, customers may use FINRA’s Broker Check service to obtain information about a Registered Person’s history of improper practices.
As a consequence, false or inaccurate information reported on Form U5 may serve as the basis for defamation claims by Registered Persons against former employers that seek the expungement of such statements from those documents. To obtain that remedy, Registered Persons must file an arbitration demand with FINRA within six years of the date the U5 was recorded in the CRD and obtain an award that rules that the “defamatory, misleading, inaccurate, or erroneous” information must be deleted from that record.
Finally, although arbitrators apply state law to determine whether Form U5 statements are defamatory, a claimants’ burden of proof is less burdensome than in judicial proceedings. Generally, arbitrators focus on whether the statements are inaccurate or false, not whether the technical legal elements of a defamation claim have been proven. FINRA arbitration proceedings are confidential in that the hearings and the evidentiary record are not open to the public. Thus, the only information released are the parties’ names, the nature of the claims, the arbitrator’s findings, and the remedy granted, all of which can be found at http://finraawardsonline.finra.org. However, no opinions are published and no reasoning is provided as to the awards published on the database, only a short description of the claim and the relief granted.
Claimants in FINRA arbitration may seek monetary damages in addition to the expungement of information from a Form U5, especially where a Registered Person also alleges claims for wrongful termination, breach of contract, and tortious interference with business opportunities. Accordingly, Form U5 defamation claims are almost always accompanied by such claims.
Employers and Registered Persons can attempt to avoid costly and time-consuming arbitration by agreeing to the statement about the reasons for a termination that will be provided in a Form U5. FINRA’s requirement that statements on a Form U5 be truthful and sufficiently informative may limit the ability to negotiate such agreements, but both employers and Registered Persons can take steps to ensure that the statements on that form are accurate.
For more information on FINRA’s Form U5, please contact Mike Smith at 410-583-2400 or firstname.lastname@example.org.