U-4 & U-5 Violations

The regulatory Form U-4 is a lengthy document that is required to be filled out by any stockbroker seeking employment and licensing with a brokerage firm. It covers numerous areas of inquiry which must be continually updated. For example, the following are some of its disclosure requirements:

Sro Registrations
Jurisdiction Registrations
Examination Requests
Professional Designations
Identifying Information/Name Changes
Residential History
Employment History
Other Businesses
Criminal Disclosures
Regulatory Action Disclosures
Civil Judicial Disclosures
Customer Complaints/Arbitrations/Civil Litigation
Termination Disclosures
Financial Disclosures, Such As In A Bankruptcies, And
Any Judgments Or Liens.

Both the broker and his firm must sign off on the Form U-4 and any updates. In addition, when an update is required by, for example, a customer complaint that is filed, both the broker and the firm will report the complaint. Sometimes those reports are dramatically different, especially if the broker has moved on to a different brokerage firm. Defamation claims based upon false information reported on the Form U-4 typically arise in this scenario.

However, it is also a violation for a stockbroker to not accurately answer all questions honestly on the Form U-4. Brokerage firms and stockbrokers do not like to receive complaints, so sometimes they do not accurately report them or timely update the form. I have seen many a Form U-4 where a complaint is reported and under status, it states that the complaint is still pending although it was filed five years earlier. In reality, the complaint was settled, but the firm never updated the Form U-4. Accurate reporting is required for all sales practice related complaints.

It used to be that Forms U4 and U5 required member firms to report allegations of sales practice violations that were made against a registered person only when the registered person was actually a named party. If, for example, the brokerage firm was named as a respondent and the stockbroker was only identified in the body of the Statement of Claim, no reporting was required. Fortunately, that all changed in 2009 and now brokerage firms must report arbitrations against their brokers when the stockbroker is identified throughout the body of the Statement of Claim, but is not an actual Respondent.

Stockbrokers often fail to disclose on the Form U-4 that they have had felony arrests. Felony convictions or guilty pleas result in a statutory disqualification from working as a stockbroker.

The Form U-5 is generated when a stockbroker leaves employment at a brokerage firm and is filled out only by the brokerage firm. The most common U-5 violations occur when the brokerage firm reports a termination for reasons that are not true. These violations give rise to two claims on the part of the stockbroker against the broker dealer: wrongful termination and defamation/libel.

The following are some of the disclosure requirements on the Form U-5:

Whether the termination was a full or partial termination
Date of the termination
If permitted to resign or discharged or “other”, the brokerage firm must provide an explanation.
Was the broker under investigation at the time of termination?
Was an internal review going on at the time of the termination?
Are there any criminal, regulatory action, or customer complaint disclosures?
Form U-5 defamation cases have been on the rise at FINRA and stockbrokers who prevail often receive substantial awards for such things 
as lost wages and emotional distress.

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