The NASD requires its member firms to complete and file a U-5 termination notice whenever employment ceases, and in the case of an involuntary separation from employment, to disclose the reasons for the discharge of that employee. See NASD By-laws, Art. IV, § 3(a). Some of the reasons listed by member companies on the U-5 forms have included the employee’s refusal to cooperate with the compliance department, suspicion of fraud or suspicion of other misconduct. This report stays with the former employee throughout their career and could substantially impair their ability to gain employment at another NASD member firm. It is not uncommon under these circumstances for the former employee to sue the member company, claiming libel or other damage to reputation or economic advantage. If these cases must be litigated on the merits of truth or falsity, it is likely that fact issues will require an evidentiary hearing or a trial at great cost to the member company.
In a common law claim for damage to reputation, most jurisdictions recognize privileges belonging to the defendant, which, in varying degrees, may defeat the claim as a matter of law. An absolute privilege bars suit over a communication, even if defamatory, because of competing public policy considerations that recognize the chilling effect of such suits. A qualified privilege is less favorable to the employer and depends on the reasonableness of the employer’s conduct and commonly presents an issue requiring a trial for resolution.
In an unpublished opinion, Galligan v. Edward Jones & Co., 2000 WL 785041 (Ct. Super. 2000), the Court expressed what had been the common view that statements made by the member company on the U-5 termination notice are only protected by a qualified privilege defense and therefore refused to summarily dispose of the issue.
At least in cases subject to New York law, member companies will be protected from suit over pertinent information communicated on the U-5 termination notice by virtue of a recently decided New York Court of Appeals case that expanded the absolute privilege to apply it to the completion of the U-5. The Court’s well reasoned decision provides a blueprint for the public policy arguments that should be pursued in other jurisdictions that have decided this issue less favorably to the employer.
In Rosenberg v. MetLife, 8 N.Y.3d 359 (2007), the New York Court of Appeals declared that statements made by the member firm on the U-5 termination notice are absolutely privileged because it is a preliminary step in the quasi-judicial process the NASD uses to investigate and sanction violations of securities laws. The Court of Appeals rejected the former employee’s claim that the completion of the U-5 was too attenuated from any judicial proceeding to fall under the rubric of the litigation privilege. The Court of Appeals found strong public policy considerations required recognition of an absolute privilege as to pertinent communications on the U-5 termination notice because it is a preliminary step in the NASD’s investigation of brokers in furtherance of regulating the industry. Inasmuch as the absolute privilege defeated the defamation claim, the Court of Appeals agreed that the lawsuit against MetLife was properly dismissed.
Member dealers that have a nexus with New York should also evaluate whether its employment documents are written in such a way so as to invoke these immunities to defeat such claims at an early stage of the case..