Improper Use of Unwarranted Disclosures in Regulatory Report of Financial Advisors to Benefit Broker/Dealer

In recent years, the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”) have revamped their efforts in making it easier for investors to access the advisors’ regulatory reports (through the CRD of the IARD systems). To further promote disclosure of wrongdoing by Financial Advisors, FINRA and the SEC have also taken action to encourage Broker/Dealers to disclose any financial advisor wrongdoing. We applaud the efforts of the SEC and FINRA to give investors the right tools to properly select the right investment professional, which we believe is paramount in investor protection. Unfortunately, as discussed below, these efforts to protect the public are sometimes used improperly by Broker/Dealers to handcuff current employees and punish former employees, all in the name of profits for the Broker/Dealers (rather than investor protection).


When defective products are designed by major financial institutions and then deceptively marketed on both financial advisors and the public, there are instances where certain financial advisors receive disclosures in their regulatory report which can harm the advisor’s ability to garner new business, or even prevent the advisor’s transition to another firm. For example, we have concerns about disclosures on a Financial Advisor’s regulatory report that resulted from the actions of a different financial advisor selling a defective product designed by the Broker/Dealer. Specifically, when a Financial Advisor is assigned a customer account (due to another advisor’s retirement or termination), an inherited customer complaint can potentially result in the Broker/Dealer reporting the complaint on the new Financial Advisor’s regulatory record for the public to see even if the customer complaint is entirely based on actions perpetrated by the former advisor. In fact, there are instances in which the new advisor handling the account has not even had the chance to meet and/or speak with the client and still receives a disclosure on his/her CRD.

Similarly, when broker-dealers design marketing strategies designed to generate more business, they sometimes encourage complaints against Financial Advisors that then lead to a reportable event on the Financial Advisors regulatory record. For Example, a regulatory report on a Financial Advisor’s record may result from a customer’s solicited response to a survey designed by a Broker/Dealer.

Advisors Mistakenly Believe it is the Firm’s Responsibility

In situations like this, many advisors mistakenly believe that it is the firm’s responsibility to ensure that the advisor’s CRD will be cleared (normally through an expungement proceeding under FINRA Rule 2080). In reality, Broker/Dealers often fail to actively assist the advisor in removing customer complaints that don’t belong in the advisor’s record. Financial Advisors need to be aware that they should discuss their expungement options with their firms shortly after an improper disclosure appears on their CRD (i.e., after a U4 amendment is filed with FINRA). If the firm is unwilling or unable to assist the advisor to attempt to obtain an expungement, the advisor should consult with an attorney and discuss all available options (e.g., initiating an expungement proceeding on his/her own, assert employment claims against the firm, the transition to another firm, etc.).


The Vernon Litigation Group’s FINRA team of attorneys continues to represent both investors and financial advisors nationwide against Brokerage firms, including fights between financial advisors and brokerage firms relating to transition disputes, promissory note disputes, wrongful termination, U5, CRD, and other defamatory disclosures, discrimination, and other employment-related abuses by the financial institutions.

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