September 7, 2016
It has become an increasingly frequent topic of conversation in my law practice:
That cascade of events typically occurs when the FINRA member firm broker-dealer files a Form U5 that parrots the reasons for termination provided by the affiliate. Since the affiliate is not a broker-dealer and is not a FINRA member firm, why should the affiliate's explanation for termination be filed by the FINRA member in a formal regulatory disclosure document? For a recent case raising some of these issues, read today's BrokeAndBroker.com Blog.
- A registered representative is also an employee of a non-FINRA-member affiliate of the broker-dealer;
- the rep is discharged by the affiliate for non-securities related issues;
- the broker-dealer discharges the registered rep largely based upon the termination by the affiliate; but
- regulatory disclosures filed by the broker-dealer present the appearance that the misconduct took place at the FINRA member firm and involved securities-industry misconduct.
Case In Point
In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in June 2015, Claimant Nahas sought an expungment of information placed on his Uniform Termination Notice for Securities Industry Registration ("Form U5") in August 2013. by Respondent Nationwide.In the Matter of the FINRA Arbitration Between John Emile Nahas, Claimants, vs. Nationwide Investment Services Corporation, Respondent (FINRA Arbitration 15-01391, August 26, 2016).
SIDE BAR: According to online FINRA BrokerCheck records as of September 7, 2016, Nahas was first registered in 2001.
Respondent Nationwide generally denied the allegations and asserted various affirmative defenses.
In April 2016, the matter settled and the parties submitted a Joint Motion for Stipulated Arbitration Award. Following the ineligibility for service of one of the three arbitrators, the expungement hearing proceeded with the remaining two.
Having found certain comments on Claimant Nahas's Form U5 to be defamatory, the FINRA Arbitration Panel recommended the expungement of the explanation in the "Reason for Termination" and its replacement with "Other."
SIDE BAR: The applicable Questions on the Form U5:
3. FULL TERMINATION
Is this a FULL TERMINATION?
Note: A "Yes" response will terminate ALL registrations with all SROs and all jurisdictions.
Reason For Termination:
Discharged Other Permitted to Resign Deceased Voluntary
If the Reason for Termination entered above is Permitted to Resign, Discharged or Other, provide an explanation below:
If amending the Reason for Termination and/or termination explanation, provide an explanation below:
The Panel recommended that the "Termination Explanation" be changed to:
Registered Representative was an employee at will of the parent company. His registration was terminated as a result of his employment with the parent company being terminated as a result of his behavior toward another employee. Not securities related, not customer related. The reason for amending the Reason for Termination and/or Termination Explanation is administrative in nature.
Bill Singer's Comment
The FINRA Arbitration Decision doesn't spell out the specifics of what Nationwide Investment Services filed concerning its termination of Claimant Nahas; however, we might reasonably infer that his Form U5 indicated that he had been "Discharged" and that the "Termination Explanation" did not set forth sufficient facts as to distinguish what took place at the non-FINRA-member affiliate from what did not take place at the FINRA member firm.
I'm won't criticize this particular FINRA Arbitration Decision for not providing sufficient content and context about the underlying termination of Nahas by the affiliate because that might unfairly twice-victimize the Claimant. The goal of most expungement arbitrations is to remove any trace of the offending prior disclosures and to replace the offensive language with what is deemed fair and accurate. In balancing the competing goals of providing sufficient content and context with protecting a victimized registered rep from further defamation, the latter consideration should generally prevail.
I have to ask, however, why this damn mess couldn't have been settled without recourse to litigation by Nahas? Admittedly, I don't know what the former employer and former employee were demanding by way of revisions; and, similarly, I concede that I have no idea what demands were on or off the negotiating table. Nonetheless, let's review what the arbitrators ultimately recommended:
- Registered Representative was an employee at will of the parent company.
- Nationwide had some issue with clarifying this aspect of Nahas's dual employment? Seems to me that the broker-dealer could have agreed to this minor revision without the need for litigation.
- His registration was terminated as a result of his employment with the parent company being terminated as a result of his behavior toward another employee.
- In parroting its affiliate's version of events, the FINRA member firm should have made it clear that Nahas's securities-industry registrations and employment were terminated solely as a result of alleged misconduct that took place at a non-securities-industry affiliate and with another employee of that affiliate. Those clarifications do not strike me as earth-shattering concessions but do present circumstances that should have prompted some voluntary amendments by Nationwide.
As my long, long record of published commentary reflects, I have never been a fan of so-called financial superstores and have long argued against overblown enterprises based upon the purported benefits of cross-branding and cross-marketing. At some point, the alleged economies of scale translate into nothing more than "cumbersome," and the ever-expanding corporate divisions and product lines weigh down most organizational structures with silos, turf wars, and inefficiency. In trying to understand Nahas v. Nationwide, Nationwide comes off to me as looking unfair, unreasonable, intransigent, and vindictive. And that's how opinions get formed. And that's how industry employers develop bad reputations with future employees.
- Not securities related, not customer related.
- If the motivation for the affiliate's firing was a non-securities, interpersonal matter between two affiliate employees, then why wouldn't Nationwide have agreed to amend its prior Form U5 filing to clarify those facts? The only explanation that comes to my mind is that the former employer dug in its heels in a fit of pique.