Reducing the Risk of Defamation from FINRA Form U5 | Ballard Spahr LLP
There are growing concerns about defamation cases against financial institutions based on statements made in the Uniform Notices of Termination for Securities Industry Registration (Form U5), required by the Financial Industry Regulatory Authority ( FINRA) after the Registered Representatives have left. We write to highlight these cases, possible defenses you may have, and recommendations for avoiding litigation where possible.
Obligation to file the U5 form
FINRA requires companies to file Form U5 when a Registered Representative leaves for any reason, including resignation, voluntary leaving, or dismissal. The U5 form serves to terminate the departing representative’s association with that firm and also allows FINRA and other regulators to monitor investigations of such individuals and potential disciplinary matters.
On the U5 form, companies must disclose the reasons for the individual’s departure; indicate whether the individual has been the subject of any internal investigations, civil litigation, or criminal or regulatory investigations related to their work; and, if necessary, provide additional information on these investigations. Businesses provide the U5 form to the individual and to FINRA, which then keeps copies of the forms in its central record depository.
Form U5 Defamation Claims
Unsurprisingly, individuals often dispute the disclosures made by their former firms, especially during contentious or involuntary departures. Increasingly, these individuals are filing defamation claims based on statements made in Form U5, often in conjunction with claims of breach of contract or employment discrimination related to their departure.
Despite this risk, companies are nonetheless required to provide truthful and complete information on Form U5, especially given the importance of these forms to FINRA in monitoring and investigating potential misconduct. So the question arises: how can companies protect themselves against threats of defamation when making mandatory disclosures about an employee who may dispute the disclosures or prefer to keep them out of the public records maintained by FINRA? ?
Defenses against U5 defamation claims
Many states offer at least some level of protection for statements made in Form U5, but the scope and strength of these defenses vary widely.
In New York, statements made in a U5 form are protected by absolute privilege, that is, they cannot in any way form the basis of a claim for defamation. The New York courts have recognized the importance of these disclosures to FINRA’s investigative and quasi-judicial functions as well as the public policies advanced by the disclosures. As the New York Court of Appeals explained in Rosenberg v. Metlife, Inc., 8 NY3d 359, 367-68 (2007):
The public interests involved in filing Forms U-5 are significant. The form is designed to alert [FINRA] to potential misconduct and, in turn, allow [FINRA] to investigate, sanction and deter misconduct by its registered representatives. [FINRA]Actions ultimately apply to the benefit of the general investing public, who stand to suffer substantial harm if exposed to unethical brokers. Accurate and direct answers on the U-5 form are essential to achieving these goals.
In concluding that statements in a U5 form are privileged, the court also relied on the fact that filing the form is mandatory and that companies may be subject to penalties for failing to provide truthful information. Identifier.
California courts have also ruled that Form U5 statements are privileged under California Civil Code Section 47(b), which immunizes postings in “judicial, statutory, or other official proceedings,” so long as they relate to FINRA’s application and rules. As one appellate court explained,[w]Where Form U5 identifies allegations of improper conduct by a broker, a matter which FINRA may need to investigate, it may on those occasions be considered a communication made in anticipation of the commencement of an action or proceeding. ‘another official procedure’, which is considered absolutely privileged under section 47(b). Tilkey vs. Allstate Ins. Co., 56 Cal. App. 5th 521, 545 (2020) (internal marks and citations omitted); see also Romaneck v. Deutsche Asset Mgmt., no. C05-2473 TEH, 2005 US Dist. LEXIS 33712, at *16 (ND Cal. 6 Sept. 2005) (extending privilege to Form U5 because it is or may be a “precursor to an investigation”).
However, while mandatory disclosures and related explanations are absolutely privileged, the privilege does not extend to voluntary disclosures or disclosures that address matters beyond FINRA’s jurisdiction, for example, statements that the broker was fired for threatening or physical behavior. prejudice. View Tilkey, 56 Cal. App. 5th at 545-47.
The largely absolute privileges available in New York and California do not prevent plaintiffs from suing, but they should provide a clear basis for the courts to dismiss claims as soon as possible and may be helpful in discouraging former employees from make these claims.
Several other states grant conditional or qualified privileges for statements made in Form U5. These privileges protect statements made in good faith and without “actual malice,” a technical term that does not refer to traditional malice or ill will, but rather refers to knowledge of a statement’s falsity. In these jurisdictions, the only way for an individual to successfully bring a U5 defamation action is to overcome the privilege, usually by proving that the company knew the impugned statement was likely false, but included it anyway.
These conditional privileges should also provide strong defenses. However, just as courts have limited California’s absolute privilege to statements in the U5 form itself, states recognizing conditional privilege generally do not extend the privilege to statements made outside of the U5 form, such as press releases releases or client alerts, as these publications are not legally required, are not precursors to investigations in the same way as those included on Form U5, and do not serve the same public policy purposes. Companies should therefore be extra careful given the additional risk of defamation associated with press releases, internal messages about departures and other communications outside of the mandatory filings.
According to the state, companies can also benefit from “anti-SLAPP” laws, designed to deter “strategic public participation lawsuits” — frivolous lawsuits intended to deter speech on matters of public interest. About 30 states now have anti-SLAPP laws on the books, although the scope and reach of the laws vary widely, as well as the remedies available.
These state laws can increase a plaintiff’s burden of proof, create procedural mechanisms for the expeditious resolution of SLAPP suits, and, in many cases, allow successful defendants to recover the fees and costs of their lawyers. See, for example, Cal. Civil. proc. Code § 425.16; New York Civil. Rights Act § 76-a.
Because courts have consistently ruled that Form U5 serves an important public purpose, companies may be able to rely on anti-SLAPP laws in states where they exist, both as a defense or as an additional remedy in the event of a litigation and, particularly where they permit the recovery of attorneys’ fees, as a means of discouraging threatened lawsuits before they are filed. See, for example, Fontani vs. Wells Fargo Invs., LLC, 129 Cal. App. 4th 719, 731-32 (2005) (enforcement of California anti-SLAPP statute and removal of U5 libel action), frowned on other grounds in Kibler v. N. Inyo Cnty. local hospital. Dist., 39 Cal. 4th 192, 203 n.5 (2006); Arges v LPL Fin., LLP, No. D076790, 2020 Cal. App. Cancel ad. LEXIS 7797, at *23 (November 24, 2020) (upholding the dismissal of U5’s defamation claim and awarding attorneys’ fees and costs, based on anti-SLAPP law).
How can companies manage exposure?
Some recommended steps for companies preparing Form U5 filings:
- Have an experienced legal advisor review both the U5 form and all associated communications for defamation issues in addition to employment and regulatory issues.
- Engage an attorney immediately upon receipt of any defamation threats, to assess state-specific defenses and to advise on their assertion in pre-litigation negotiations (including because some of them may be waived if not asserted quickly).
- Involve an experienced defamation attorney, familiar with the privileges and available defenses, in the defense of any proceedings alleging defamation arising out of a Form U5 or related communications.
How Ballard Spahr can help you
As you know, Ballard Spahr regularly advises financial institutions on regulatory compliance matters, but unlike other firms, we also house one of the best First Amendment and defamation litigation teams in the country. Our Media and Entertainment Group routinely advises clients – not only major media clients, but also financial institutions, corporations and individuals – on defamation risk reduction and defends clients against defamation and related claims, optionally. We are also leaders in using state antigag laws in response to defamation claims, frequently obtaining not only terminations, but also compensation for our clients’ attorneys’ fees and expenses. Because U5 claims raise issues unique to the tort of defamation, our team of specialists are available both to advise you on minimizing risk when drafting Form U5 submissions and to respond to claims or lawsuits that your company might encounter.