• NY Court of Appeals Holds Absolute Privilege Protects Employer's Disclosures on NASD Form U-5
  • April 9, 2007 | Authors: Michael Delikat; Kristina Hammond
  • Law Firm: Orrick, Herrington & Sutcliffe LLP - New York Office
  • Court's Holding: In a decision which will come as welcome news to employers in the financial services industry who often face defamation claims from terminated registered employees, the New York Court of Appeals held today that statements made by an employer on the NASD Form U-5 termination notice are subject to an absolute privilege in a defamation lawsuit. Rosenberg v. MetLife Inc.

    Court's Reasoning: Responding to a question certified by the United States Court of Appeals for the Second Circuit, Judge Graffeo, joined by Judges Ciparick, Read and Jones, rested the Court's decision on the compulsory nature of the Form U-5 and its role in the NASD's quasi-judicial process as well as on the fact that the public interest will be best protected by full and candid responses on the Form U-5. The  Court held that the NASD "is a quasi-governmental entity that has been delegated authority to enforce the requirements of the Exchange Act and is the primary regulator of the broker-dealer  industry." Because the NASD relies upon the Form U-5 to alert it to potential securities law violations, "accurate and forthright responses are critical." Without full and honest answers, the NASD would be hampered in its ability to "investigate, sanction and deter" misconduct, which would result in harms to the general investing public. 

    Caution: The decision, however, will not make U-5 defamation claims dismissible as a matter of law since the Court noted that employees who claim they were maliciously defamed on a Form U-5 may still "commence an arbitration proceeding or court action to expunge any alleged defamatory action". The decision is also, of course, an interpretation of New York law, leaving the issue open in other jurisdictions. But the absence of a claim for monetary damages resulting from defamation damages under New York law will hopefully deter the filing of many U-5 defamation claims.

    Copies of SIFMA Brief and Court's Decision: We prepared the amicus brief on behalf of The Securities Industry and Financial Markets Association ("SIFMA") and if you would like a copy of that brief, please e-mail Mike Delikat or Kristina Hammond.