Allegations of sexual harassment or other workplace misconduct must be taken seriously in any business. For broker-dealers and other businesses regulated by the Financial Industry Regulatory Authority (FINRA) or the Securities and Exchange Commission (SEC), thorough investigations are a must. However, financial services firms must also be deliberate about how they choose to disclose the results of such investigations, being ever aware of the risk of defamation lawsuits from the targets of such investigations.
Background: Public Disclosure for Financial Representatives
Because of the nature of what they do, it’s imperative that the public be able to trust the investment adviser representative and brokers who manage their retirement nest eggs and other investable assets. To become registered to provide advice or buy/sell securities for a new firm, applicants must undergo scrutiny about their backgrounds in addition to passing qualification examinations. Criminal matters, personal financial matters, and previous employers’ disciplinary actions are all reportable events on Form U4, the application for registration. The majority of this information is made available to the public via the internet through FINRA’s website.
When a registered employee’s or contractor’s registration is terminated for any reason, the employing financial firm must file Form U5, which terminates that registration. Employers must provide the reason(s) they are terminating the employee’s registration. This information is then made available to every prospective employer the terminated employee wants to work for. Criminal or internal disciplinary matters that result in termination need to be added to the employee’s record, available for anyone to see at any time.
The purpose behind what can seem like invasive disclosure requirements is to promote transparency. Of course, the far-reaching public disclosure can also have a chilling effect on an affected employee’s future employability in the financial industry.
Disclosing Investigations and Outcomes on Form U5
There are three options employing firms can use when completing Form U5 to terminate someone’s registration: “voluntary,” “involuntary,” or “permitted to resign.”
When an investigation into alleged workplace misconduct is still pending, many financial services employers choose the last option, “permitted to resign.” If an investigation has been completed and the employee is being let go because of the outcome of that investigation, the firm would likely choose “involuntary.” Regardless which of these options is selected, the terminating firm has to explain the circumstances behind the employee’s termination. This is where employers must tread lightly, balancing the need to disclose with the risk that a terminated employee will take legal action for defamation of character.
U5 disclosures about ongoing or completed investigations must be factual and complete, based on the information available to the firm at the time. Employers do have the ability to amend U5 filings at a later date, to add or correct information.
The Quality of Investigations Matters
The information the firm reports on a terminated employee’s record can only be as good as the information gleaned from the internal investigation. Because of the potential for firm liability if a terminated employee later sues the firm for defamation, financial firms should ensure workplace investigations are conducted by competent, qualified, and impartial parties. Using outside investigators can protect the objectivity of investigations.
An outside investigator can also play a key role in evaluating and crafting the proposed language for the terminated employee’s Form U5 filing, verifying that statements are consistent with the investigation’s findings and are supported by facts.
To be clear, the fact that an employee is a registered representative for a broker-dealer or investment adviser shouldn’t impact the way the investigation is completed, but it does call for extra care and scrutiny when the outcome is ultimately disclosed.