FINRA Response and U4/U5 Explanations – Get it Right the First Time and be Consistent

In my practice I have noticed a recent uptick in terminations for cause as well as (particularly in the case of a registered representative attempting to change firms) the necessity to provide an explanation for any CRD blemish to new broker dealers,  clearing firms and insurance companies.

Terminations for cause from a broker dealer automatically trigger an inquiry from FINRA and often one or more states.  The RR’s response to this inquiry is very important in that the response has more than one purpose.  The first goal of any communication with FINRA is to illicit a ‘no-action letter’ (FINRA’s expression that no enforcement action will be pursued) Secondly, the substance of the response may be used to explain the termination to a new broker dealer, insurance company or clearing firm.  Given the multiple uses of the response it is critical that it be (1) well thought out; (2) succinct but informative; and (3) contain no admissions to the extent they can be avoided.  These guidelines should apply to any communication with FINRA given the stakes and the very real possibility that FINRA may elect to take formal action if they are not convinced that no action is appropriate.  The guidelines are also important in the ever changing regulatory environment in which states may take the lead in termination investigations and industry members are increasingly demanding explanations for any CRD entry.

While many RRs are good writers and communicators, they seem not to understand the above guidelines or that their initial explanation to FINRA may lock them into a position which hurts (sometimes permanently) their ability to move to another firm or get appointed in certain states or with certain insurance companies.

I recommend that RRs hire counsel at the first sign that they might be released from their broker-dealer under any circumstances other than a voluntary resignation.  I understand that such awareness is not realistic in those instances in which a RR has unwittingly violated a firm procedure or industry rule/law.  But, however slight the chance, the possibility that a firm may reconsider a termination for cause and charge the reason for separation to voluntary or permitted to resign could make a huge difference in a RR’s career.

Further, I recommend that upon termination for cause, the RR absolutely retain counsel to assist in the formulation and submission of the RR’s response to the FINRA inquiry.  This step is essential, with the understanding and mindfulness that the RR’s explanation will be scrutinized by FINRA, one or more states and industry members (including potential hiring firms) with the power to dramatically impact the RRs career.

Learn More About FINRA Arbitration at www.ZafisLaw.com

Share this post

Leave a Reply

Your email address will not be published. Required fields are marked *