Form U5: Sword or Shield? The Impact of Rosenberg v. MetLife, Inc.

Client Advisory

April 6, 2007
by Jeffrey S. Boxer and Michele Ross

On March 29, 2007, New York’s highest court finally resolved a longstanding debate in the securities industry in New York: whether statements made by an employer on a National Association of Securities Dealers (“NASD”) Uniform Termination Statement for Securities Industry Registration (“Form U5”) are subject to an absolute or qualified privilege in a defamation lawsuit against the employer. In a decision that grants member firms seemingly unfettered freedom to discuss the circumstances surrounding an employee’s termination, the New York Court of Appeals ruled that statements on a Form U5 are subject to an absolute privilege, thus shielding member firms from liability for defamation. 

Behind the Form U5

Within 30 days after termination for any reason of a registered employee’s employment, a member firm must complete and submit a Form U5 to the NASD and give a copy to the employee (see NASD By-Laws, Article V, § 3 [a]). The employer is required to disclose the reasons for the termination on the Form U5, and failure to do so will result in a penalty. Form U5 serves dual purposes: First, it operates as an industry-wide mechanism allowing prospective employers and public investors to thoroughly research the background of an employee or advisor whom they may hire. Second, Form U5 assists NASD in a regulatory capacity by alerting it about persons suspected of misconduct, which in turn enables NASD to take appropriate measures to initiate disciplinary proceedings.

In recent years, Form U5 filings have been the subject of considerable attention, with New York courts split as to the type of privilege to be applied to member firms defending a defamation action. Some courts in New York gave member firms an absolute privilege regarding statements on a Form U5, essentially giving the firms immunity from any lawsuit premised on allegedly defamatory remarks disclosed by the firm in the Form U5. Conversely, other New York courts have entertained the notion that Form U5 statements are subject only to a qualified privilege, which limits liability but can be vitiated by demonstrating that a defendant firm prepared a Form U5 with malice. This debate is now over.

 The Decision

After being terminated by MetLife, Inc., Chaskie Rosenberg brought an action against his former employer alleging, among other things, that MetLife’s Form U5 contained malicious and defamatory statements. The Form U5 stated:

An internal review disclosed Mr. Rosenberg appeared to have violated
company policies and procedures involving speculative insurance sales
and possible accessory to money laundering violations.

 Rosenberg v. MetLife, Inc., No. 23, slip op. at 4 (N.Y. Court of Appeals March 29, 2007).

The Federal District Court in Manhattan held that under New York law, MetLife’s statements on the Form U5 were absolutely privileged, and the Court granted MetLife’s motion to dismiss the fraudulent misrepresentation and libel claims. On appeal to the United States Court of Appeals for the Second Circuit, Mr. Rosenberg argued that Form U5 statements should be given a qualified, not an absolute, privilege. The Second Circuit found that this was a question of New York law that had never been resolved, and it asked New York State’s highest court to rule on this issue. 

In addressing the question of which privilege should apply to Form U5 disclosures, the New York Court of Appeals determined that given the nature of NASD’s self-regulatory capacity and the fact that it remains subject to oversight by the Securities Exchange Commission, the filing of a Form U5 should be considered a preliminary step in a quasi-judicial process, thus justifying the application of an absolute privilege to all statements made on a Form U5. Id. The Court relied on the safeguards inherent in NASD’s quasi-judicial process along with NASD’s interest in maintaining high standards for its brokers to conclude that “[t]he Form U-5’s compulsory nature and its role in the NASD’s quasi-judicial process, together with the protection of public interests, lead us to conclude that statements made by an employer on the form should be subject to an absolute privilege.” Id., at 11.

Practical Impact on Member Firms

The decision in Rosenberg allows member firms to provide a full and fair explanation about an employee’s termination without fear of being dragged into court on claims of defamation or libel. Despite this practical application of the court’s decision, however, member firms are not fully removed from legal action relating to allegedly defamatory statements made on a Form U5. Indeed, a former employee still has the right to commence an arbitration proceeding or court action to expunge any allegedly defamatory language included on a Form U5, and member firms can expect to be pulled into such actions if former employees believe they have been defamed or libeled by the firm’s Form U5. Member firms also should be careful not to distribute Form U5s to third parties, since a showing of bad faith in doing so could lead a court to vitiate the absolute privilege. Finally, member firms should also be aware that nothing in the Rosenberg decision provides protection or privilege for any statements made by a member firm outside of a Form U5.

When filling out a Form U5, member firms should be honest, accurate and forthcoming, but should remain cautious about going beyond the scope of the actual reasons for an employee’s termination. These precautions should ensure that a member firm avoids the costs associated with an arbitration or court proceeding seeking to expunge the information on a Form U5. 

If you have any questions about the contents of this advisory, please contact Jeffrey S. Boxer (212-238-8626, or Michele L. Ross (212-238-8683, of our New York Office.

Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2020 Carter Ledyard & Milburn LLP.
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