Mandatory FINRA arbitration controls all employment disputes between FINRA member businesses and their employees that are registered with FINRA. The Financial Industry Regulatory Authority (“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 disputes involving the investment and securities aspects of its member firms and their employees. This arbitration process is used to settle a variety of customer, member, and employee claims, including employment disputes that may have an effect on the professional record of a member firm’s employee.
FINRA Registration Process
In an effort to protect investors, FINRA has established the Central Registration Depository (the “CRD”). The CRD is an online database of information about employees of FINRA member firms who are “actively involved in the member’s investment banking or securities business.” Qualifications Frequently Asked Questions (FAQ) – Registration, FINRA, http://www.finra.org/Industry/Compliance/Registration/QualificationsExams/Qualifications/faq/p011102#1-2 (last visited July 22, 2013). These “Registered Persons” include partners, officers, directors, branch managers, department supervisors, investment bankers, brokers, financial consultants, salespersons, and any other member firm employee who is involved, in some way, with the firm’s investment and securities operations. The CRD contains the registration records of more than 6,800 registered broker-dealers and the qualification, employment, and disclosure histories of more than 660,000 active registered individuals. Central Registration Depository (CRD), FINRA, http://www.finra.org/Industry/Compliance/Registration/CRD/ (last visited July 22, 2013).
Importantly, the information available on a Registered Person’s CRD record includes employment history, customer complaints, and findings of illegal activity. Accordingly, prospective employers are extremely interested in CRD information regarding Registered Persons being considered for employment. When a FINRA member firm hires an employee who will be involved in the member firm’s investment banking or securities business, the firm must submit a Form U4 to FINRA. The Form U4, which is signed by the new employee, registers the employee with FINRA, updates that employee’s CRD record with his or her new employment information, and acts as the employee’s consent to allow his or her new employer to search the employee’s prior CRD record. Because a Registered Person’s CRD record cannot be accessed without that individual’s express authorization, prudent employers make job offers contingent on a review of a Registered Person’s history as shown in the CRD.
In addition to providing consent of access, the Form U4 also acts as an agreement to arbitrate. Found in section 15A of the Form U4, statement number five binds the registered person “to arbitrate any dispute, claim or controversy that may arise” between the Registered Person and their employer. Likewise, the Form further states that any arbitration award rendered against the Registered Person “may be entered as a judgment in any court of competent jurisdiction.”
Termination and the Form U5; Expungement Process
FINRA member firms must file a Uniform Termination Notice for Securities Industry Registration, commonly called a Form U5, within 30 days after terminating a Registered Person’s employment. The U5 includes information regarding the reasons for the termination and whether it was full or partial. FINRA requires firms to provide sufficient detail to enable a reasonable person to understand the circumstances that triggered the termination. FINRA Reg. Notice 10-39. The rules also require firms to amend a U5 if new information becomes available after it was filed. Id.
The accuracy of a Registered Person’s CRD record is of critical importance to that person’s future employment opportunities. Statements about the termination of Registered Persons can severely impair their 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. If the CRD record has false or defamatory information indicating that a Registered Person has a history of improper practices or violations, it would become unfairly difficult for that Person to obtain future work with other firms or secure new clients in the financial services industry.
For these reasons, false or inaccurate information reported on a Form U5 may serve as the basis for defamation claims by Registered Persons against their former employers. Registered Persons may also request that FINRA expunge such false information from the CRD records. To obtain such a remedy, Registered Persons must file an arbitration demand with FINRA within six years of the date the U5 was recorded in the CRD. The arbitration panel consists of one to three individuals chosen by the parties and the arbitration process generally takes one year to complete. Arbitration is the only procedure available to Registered Persons to modify a U5 and FINRA may expunge information only if the arbitrators find it to be “defamatory, misleading, inaccurate, or erroneous.” See Swinney v. Merrill Lynch Pierce Fenner & Smith Inc., FINRA Dispute Resolution, Arbitration No. 11-02004, page 1 (2012).
In that regard, the arbitration award must: (1) specifically require expungement; and (2) supply the language to be substituted for the deleted statements. See John Nachmann, Expungement of Information From the Central Registration Depository in Intra-Industry Disputes, FINRA’s The Neutral Corner, Vol. 2 (2010); What to Expect from the U4 and U5 Filing Process, FINRA; Fulco v. Bank of America Investment Services, Inc., et. al, FINRA Dispute Resolution, Arbitration No. 12-03686, pages 1 and 3 (2013) (employee’s termination expunged from CRD because statement was found to be “factually impossible or clearly erroneous”); Brownstein v. TD Ameritrade, Inc., FINRA Dispute Resolution, Arbitration No. 12-01358, page 1 (2012) (arbitrator issued award requiring expungement because firm did not oppose expungement of stated reason for termination).
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. Rather, the only information released are the parties’ names, the nature of the claims, the arbitrator’s conclusory findings, and the remedy granted, which can be found at http://finraawardsonline.finra.org.
Claimants May Recover Monetary Damages In FINRA Arbitration
Claimants in FINRA arbitration may seek monetary damages in addition to the expungement of information from a Form U5. This usually happens when the claimant alleges something more than inaccuracy of the statements on the Form U5, such as wrongful termination or that the Form U5 statements are also defamatory. See Decorso v. Chase Investment Services Corp., FINRA Dispute Resolution, Arbitration No. 10-00305 (2011) (claimant alleged defamation on Form U5 and wrongful termination, and was awarded expungement of defamatory Form U5 statements and $91,000 in compensatory damages); Leslie v. Wells Fargo Advisors, LLC, FINRA Dispute Resolution, Arbitration No. 10-4430, page 1 (2012) (claimant and employer settled defamation claim for compensatory and punitive damages and lost earnings and award issued requiring expungement of statements from U5). Accordingly, Form U5 claims are almost always accompanied by a variety of other claims including, but not limited to, wrongful termination, interference with business opportunities, defamation, and breach of contract.
Avoiding U5 Arbitration
Employers and Registered Persons can attempt to avoid costly and time-consuming arbitration by agreeing to the statement about the reasons for 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.
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