On March 29, 2007, in a defamation lawsuit brought by a terminated broker, the Court of Appeals of New York recently held that statements made by an employer on Form U-5 are protected by an absolute privilege under New York law. See Rosenberg v. Metlife, Inc., 2007 WL 922920 (N.Y.), 2007 N.Y. Slip Op. 02627. Read the Opinion. The NASD and the NYSE require that member firms file Form U-5 within thirty days of a registered representative’s departure.

Metlife had terminated the plaintiff's employment, and completed and filed with the National Association of Securities Dealers (NASD) a Form U-5, providing a copy of the form to the terminated employee. In setting forth the reasons for termination on the Form U-5, the employer stated that the employee "appeared to have violated company policies and procedures involving speculative insurance sales and possible accessory to money laundering violations." The company also indicated on the form that the employee had been under an internal review for violating investor-related rules.

The terminated employee sued in federal court claiming, among other things, libel based upon the allegedly defamatory statements on the Form U-5. The court dismissed that claim, holding statements made in the U-5 were absolutely privileged. The plaintiff appealed to the Court of Appeals for the Second Circuit, which then certified a question to the Court of Appeals of New York regarding whether the statements were absolutely or qualifiedly privileged.

The NY Court of Appeals explained that, under New York law, the absolute privilege can extend to preliminary and investigatory stages related to a judicial or quasi-judicial proceeding.

The court then explained that the NASD is the primary regulator of the broker-dealer industry, and the court found that it acts in a quasi-judicial capacity. "One of its central responsibilities involves the investigation and adjudication of suspected violations of the SEC's laws and regulations as well as the NASD's own rules." The court further found that the Form U-5 plays a significant role in the NASD's process, and obtaining accurate and forthright responses on the Form U-5 is critical to regulating registered brokers. Because of the strong public policy for maintaining high standards for brokers, and the quasi-judicial capacity in which the Form-U-5 is received, the court held that statements in the Form U-5 are absolutely privileged.

Two judges on the court dissented from the decision, arguing that the Form U-5 is merely informational and not part of a quasi-judicial process, and that public policy does not support an absolute privilege.

Broker-Dealer Considerations

While Rosenberg is binding only in New York, as this is an issue of state law, it is an important decision in the evolving law of defamation as it relates to Form U-5 statements. As we continue to monitor other decisions which we hope will mirror the Rosenberg decision, a broker-dealer should continue to carefully balance its obligation to fully and accurately timely disclose the circumstances surrounding a registered person’s departure against the risk that such disclosure may result in an action against the broker-dealer by the former registered person.

In connection with filing a Form U-5, a broker-dealer can mitigate the risks of a successful tort, breach or contract or other action by promptly ascertaining the facts surrounding the registered person’s departure (including interviewing all persons, including staff members as well as other registered representatives and management, with knowledge of the circumstances surrounding the departure), providing the firm’s proposed Form U-5 language to the former registered person and affording them a reasonable opportunity to comment on the firm’s proposed language prior to filing the Form U-5 and including on the Form U-5 only credible and verifiable statements of fact, as opposed to uncorroborated opinions.