U-5 defamation issue comes to a head in N.Y.

Industry lawyers are watching closely how New York’s highest court will settle a long - simmering battle over how much legal protection brokerage firms should have for statements made on so-called U-5 termination forms.
MAR 05, 2007
IRVINE, Calif. — Industry lawyers are watching closely how New York’s highest court will settle a long- simmering battle over how much legal protection brokerage firms should have for statements made on so-called U-5 termination forms. A U-5 is used to report details about why a broker left a firm. A registered representative must disclose the report to a potential employer. Brokers sometimes sue for defamation over language contained on U-5s, which is a matter of state law. In New York, courts have ruled that information contained on U-5 forms is immune to defamation lawsuits — a concept known as “absolute privilege.” Court rulings in a handful of other states protect brokerage firms from defamation lawsuits, provided they didn’t knowingly or recklessly file false information on the form, under “qualified privilege.” On Feb. 13, oral arguments were heard by the New York Court of Appeals in a case involving a lawsuit by Chaskie Rosenberg, a rep fired by MetLife Inc. in New York. On Mr. Rosenberg’s U-5, MetLife wrote that he was a possible accessory to money-laundering violations — language he has challenged. The court could rule within the next month or two, legal observers said. “I wouldn’t venture a guess” about which way the court will rule, said Maurice Heller, of Heller Horowitz & Feit PC in New York, who argued the case for Mr. Rosenberg. In the oral hearing, which lasted less than an hour, the court clearly was prepared, Mr. Heller said. The six-judge panel asked “probing questions [and] focused on the right issues,” he said. Steve Obus, a partner at Proskauer Rose LLP in New York, who represented MetLife in the case, declined to comment. The court of appeals was asked to decide the immunity question by the 2nd U.S. Circuit Court of Appeals in New York. In important cases where state law is unclear, federal courts sometimes refer the question to a state’s high court. “If the [state court] follows precedent in New York, it should come out in favor of an absolute [legal] privilege,” said Terry Weiss, partner at Sutherland Asbill & Brennan LLP in Atlanta and head of the firm’s broker-dealer litigation team. Although a lower New York appeals court set the absolute standard in 1991, one of the judges who decided that case has since flip-flopped on the issue. “It could have significance to the New York Court of Appeals if a judge who [in part] decided the leading case has changed her mind,” said Jake Zamansky, a lawyer at Zamansky & Associates LLC in New York, who filed a brief in the case for the New York chapter of the National Employment Lawyers Association of San Francisco and Washington. The New York NELA supports a qualified privilege. “In my experience, courts are hesitant to create absolute [legal] immunity in the absence of a statute,” said David Katz, an attorney at Schlam Stone & Dolan LLP in New York. He filed a brief with the appeals court arguing for a qualified privilege. Mr. Katz represents a research analyst who is suing a brokerage firm. Although the Rosenberg case will affect New York employees for the most part, Mr. Weiss said the decision may carry weight in other states. Only 19 states have decided the issue of how much protection firms should have, he said. Aside from a court in New York, a California appeals court also has concluded that an absolute privilege applies; in 17 other states, the privilege is qualified, Mr. Weiss said. “If New York came down as a state where absolute [immunity applied], that would have a great impact on the other [31] undecided states,” he said. Key issue debated A key issue in the Rosenberg case revolves around whether the simple filing of a form U-5 is part of a “quasi-judicial proceeding.” Filings and statements made in court proceedings or before court-like bodies have been held to be privileged under the law. In a friend-of-the-court brief, the Securities Industry and Financial Markets Association of New York and Washington argued that publishing U-5 information is government-mandated speech and is absolutely protected from defamation claims. But without due process, the filing of a U-5 doesn’t qualify as a quasi-judicial proceeding, supporters of Mr. Rosenberg argued. “Absolute immunity has been applied only ‘to a proceeding in court or one before an officer having attributes similar to a court,’” Liddle & Robinson LLP, a New York law firm, said in a brief it filed in the case, citing a 1978 decision by the New York Court of Appeals. Turnabout The positions staked out in the Rosenberg case is a turnabout from a decade ago, when SIFMA supported a qualified-immunity standard proposed by NASD and the Securities and Exchange Commission. That proposal was opposed by individual reps and plaintiff’s lawyers. The SEC never acted on the proposal, due to concerns about overriding state defamation law. But now that California has fallen the industry’s way, and New York is in play, the U-5 immunity issue is best left to states, its lawyers said. On the other side, Mr. Zamansky said, it’s time for NASD again to propose a qualified standard. “It’s an issue that cries out for a uniform standard,” he said. Heller Horowitz & Feit’s Mr. Heller said that the SEC is “monitoring the case.” SEC spokesman John Nester said that the agency has not taken a position on the immunity issue. Washington-based NASD did not respond to inquiries.

Latest News

Edelman Financial Engines brings fiduciary advice to small business plans
Edelman Financial Engines brings fiduciary advice to small business plans

New ADP-delivered solution gives small and mid-size businesses access to 3(38) fiduciary oversight and participant-level advice for one fee.

Hightower Signature Wealth adds $1.6B Boston-area firm
Hightower Signature Wealth adds $1.6B Boston-area firm

Boston Hill Advisors joins Hightower's national platform as the mega-RIA's latest Massachusetts move drives HTSW closer to its $50 billion target for 2026.

AI assistant Robin gives wealth firms plain-English workflow control
AI assistant Robin gives wealth firms plain-English workflow control

Feathery's Robin builds compliant operational workflows from plain-language instructions with no coding or IT teams required.

AI unicorn startups attract record venture capital in 2026
AI unicorn startups attract record venture capital in 2026

Nearly one in four newly minted billion-dollar startups this year operates in artificial intelligence, reshaping private market opportunity for advisors.

Two RFG-affiliated advisory firms merge to form $750M WFA Volare
Two RFG-affiliated advisory firms merge to form $750M WFA Volare

Two independent advisory firms merge within the RFG platform to form a $750 million wealth management practice.

SPONSORED Direct indexing webinar targets tax-loss harvesting amid market swings

Northern Trust’s Ken Lassner shows advisors how to convert volatility into after-tax portfolio gains

SPONSORED Who builds the income when the pension disappears?

Dan Biagini of American Equity says the steady decline of pensions, longer lifespans and a reset in interest rates are rewriting how advisors build retirement income