Noteworthy NASD
Enforcement Hot Topics
Misleading Form U5 Filings

James S. Shorris, Executive Vice President, NASD Enforcement, discussed a number of Enforcement Hot Topics at the recent NASD Spring Conference in Chicago, Illinois. While a number of items on the list were expected, such as supervision issues, hedge funds, soft dollars, anti-money laundering, and the focus on sales practice issues related to senior citizens and variable annuities, the surprise item was a discussion on the filing of misleading Form U5s.

This potential violation stems from the filing of a Form U5 which reflects that the employee was voluntarily released, when in fact, the firm's decision to release the employee was tied to "for cause" reasons and or the employee was fired (which would not be "voluntary"). In any event, the NASD suggests that by filing such a Form U5, the firm is filing inaccurate and or misleading information regarding the person terminated, and as such, depending on the facts, could be subject to enforcement action. An interesting side note to these potential situations is that they are relatively easy to detect. There is a record of all U5s filed, and there is usually an extensive e-mail trail with respect to the person terminated…including why.

With the above in mind, there are two significant lessons to remember. First, it is important to document and maintain records that evidence the action taken, even on a voluntary termination. Second, and equally important, it is imperative that firms continue to educate associated persons, as to the proper use of e-mail…and its effect on both litigation and enforcement actions.