The Law Planet Blog

Under Florida law, the courts have upheld a qualified privilige on disclosures made on NASD form U-5, the Uniform Termination Notice for Securities Registration. Eaton Vance Distributors, Inc. et al. v. Ulrich, 692 So. 2d 915 (Fla. App. 2nd DCA 1997). However, there are a number of brokerage firms that use a New York "choice of law" provision in their employment contracts. A recent decision was initially thought to be the death knell for defamation actions.

In Rosenberg v. Metropolitan Life Insurance Company et al., 2007 NY Slip Op 2627, the New York Court of Appeal, the state's highest court, ruled that statements made on a Form U-5 are protected by an absolute privilege. The ruling, at first blush, appeared unequivocally devastating to registered representatives wishing to assert U-5 defamation claims employed in New York and/or governed by enforceable New York choice-of-law provisions. Fortunately, however, the Second Circuit Court of Appeals, after it received the Rosenberg case back from the New York Court, identified a very legitimate and glaring hole in the Court of Appeals’ analysis. Op. issued June 14, 2007 at n. 1.

The Court of Appeals recognized that statements in a Form U-5 that are not “material and pertinent to the issues to be resolved” are probably not protected. Specifically, the court recognized that not all statements placed on a broker’s Form U-5 may be absolutely protected:

Consequently, we need not decide if there are circumstances in which statements on a Form U-5 are not absolutely privileged under Rosenberg II. We note, however, that in the context of judicial or quasi-judicial proceedings, statements made by parties, attorneys, and witnesses are absolutely privileged only ‘so long as they are material and pertinent to the issue to be resolved in the proceeding.'

While initially devastating to broker U-5 defamation claims under New York law, the Second Circuit’s latest per curiam decision holds out hope that brokers are not completely without recourse when false language is contained within a Form U-5. Moreover, because U-5 defamation analysis is governed by state law, states such as Florida that reject an absolute privilege in U-5 defamation cases remain unaffected by Rosenberg.

Here at The Law Planet, we continue to receive inquiries from recently-terminated stockbrokers about getting help with the language on a form U-5. Most brokerage firms are savvy enough to realize that getting the broker's input on the language is a major step towards avoiding defamation litigation. Our role as counsel is to make sure that the brokerage firm discharges its regulatory obligation while minimizing the impact on our client's career.

That's the view from The Law Planet, Jupiter, Florida.