The concept of giving brokerage firms an absolute privilege for U-5 filings has always troubled me. I represent firms and brokers, and am fairly confident that when if an absolute privilege was the rule, some BOMs and Regional Directors would have an absolute field day with reps they do not like, or wish to harm for their own personal or financial benefit.
There is some conflicting caselaw in NY, with some courts saying that U-5 statements are absolutely privileged, and others saying there is only a qualified privilege. The New York Court of Appeals will decide which standard is the law in New York in a very short time. Oral arguments were held last week in the case of Rosenberg vs. MetLife.
The reality is that firms do not need an absolute privilege. The overwhelming majority of firms, executives, compliance personnel and others who are deciding U-5 disclosures are honest, hardworking, and understand the importance of U-5 disclosure. That disclosure is important to the industry and regulators, and it is important to the registered person. The industry and regulators need to have accurate U-5s for supervisory and registration purposes. Financial professionals need accurate U-5s, and a methodology to correct false U-5s as well as defamatory ones, since a bad U-5 can put a registered person out of work...forever.
Firms will not be impacted by the lack of an absolute privilege...at least not the reputable firms. They will not be filing false or malicious U-5s, and will do their best to insure that the U-5 is accurate. On the other hand, managers, directors, whomever, who are not reputable, who wish to harm a departing broker, will be impacted by the lack of an absolute privilege - they will be sued for defamation, and will pay damages to the reps that they harmed.
The financial impact on a broker of a malicious U-5 is immeasurable. At a minimum it means a regulatory investigation, an investigation by one or ten states, and if it is bad enough, an inability to become employed until the matter is cleared.
I have been doing this too long to believe that there is any need for an absolute privilege. While a defamation suit certainly costs brokerage firms money, that is not a reason to prevent injured representatives from suing. We balance this sort of issue all of the time, and the harm to the firms for being sued is vastly outweighed by the damage that is done to a rep who is the subject of a false or defamatory U-5.
The reality is that the times that the issue comes up, that a rep feels that the U-5 is malicious or false, is minuscule. In most cases that I have handled where a rep believes that his U-5 is false or defamatory, there is a conversation between the firm and the rep's attorney, and most times the language is worked out so that the phrasing is true, the firm is comporting with its obligations, and the rep is not being defamed.
The problem is when the firm fabricates information on a U-5 and the devastating impact that has on the rep. Or when a firm refuses to discuss the issue, and simply allows fabrications to be filed by branch or regional managers. If the rep can't sue over it, he has lost his livelihood. Period.
Apparently none of this has been lost on the New York State Court of Appeals. Oral argument was held last week in the Rosenberg and according to press reports, the judges were skeptical.
Some have called the NY lower court case finding an absolute privilege "wrongly decided" and have blamed it for a system which is now plagued by “distorted and false filings for tactical, competitive business reasons.”
A bit of an overstatement perhaps, but there is certainly some truth to that statement. Fortunately, there is an easy fix - let reps sue when they believe their U-5 is false or defamatory, and hold a hearing on the issue.
