The New York Court of Appeals, New York's highest court, has handed employers in the securities industry in New York a substantial victory. The decision in Rosenberg v. MetLife, Inc. resolved a split among New York courts as to whether statements made by an employer on the Uniform Termination Notice for Securities Industry Registration ("Form U-5") enjoy a qualified privilege or an absolute privilege under state law. The MetLife court held that statements made by an employer on Form U-5 are absolutely privileged and cannot give rise to a claim for defamation. The decision in MetLife grants member firms the freedom to candidly discuss the circumstances surrounding an employee's termination in the Form U-5.

Significance of Form U-5

Form U-5 plays a significant role in the National Association of Securities Dealers' ("NASD") regulation of registered representatives in the securities industry. Pursuant to NASD bylaws, within 30 days after termination for any reason of a registered employee's employment, a member firm must complete and submit Form U-5 to the NASD. In addition, the employer is required to give a copy of Form U-5 to the terminated employee. As part of its obligation to complete Form U-5, the employer is required to disclose the reasons for termination of the terminated employee. Failure to do so raises substantial compliance issues and may subject the employer to financial and other penalties. The NASD stores the Form U-5 on its Central Registration Depository ("CRD"), an on-line data registration and licensing database used by regulators throughout the securities industry, to register, license and regulate securities firms and their brokers. Through one component of the CRD, the NASD allows investors to obtain certain information about individual brokers and registered securities firms. Upon request, the NASD will release information pertaining to criminal actions, civil actions, customer complaints and securities related terminations for cause via mail or e-mail. It allows prospective employers and public investors to research the employment history of an individual whom they may hire or on whose advice they rely. In addition, Form U-5 is often the first "red flag" that the NASD may receive regarding possible misconduct by a member of the securities industry and may lead to disciplinary action by the NASD.

The Decision

In MetLife, plaintiff Chasky Rosenberg was terminated by MetLife, Inc. Rosenberg then brought an action in the United States District Court for the Southern District of New York ("Southern District") asserting numerous claims, including claims for employment discrimination, libel, fraudulent misrepresentation and breach of contract. He alleged that MetLife libeled him in statements made by MetLife on Form U-5 which was filed in connection with his termination. The Form U-5 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."

The Southern District held that under New York law, MetLife's statements on Form U-5 were absolutely privileged and granted MetLife's motion to dismiss the fraudulent misrepresentation and libel claims.

On appeal to the United States Circuit Court of Appeals for the Second Circuit ("Second Circuit"), Rosenberg argued that employers should not be given complete immunity for statements made on Form U-5. Rather, they should be afforded only a qualified, not absolute, privilege. Noting that this was a question of New York law that had never been resolved, the Second Circuit certified the question to the New York Court of Appeals ("Court of Appeals") for a definitive ruling under New York state law.

The Court of Appeals accepted the certification, heard oral argument and ruled in MetLife's favor. The Court of Appeals considered the weighty competing interests on each side of the issue. It recognized that a registered representative had a legitimate concern that his reputation and future employment opportunities could be damaged by false statements made by a vindictive employer. However, that interest had to be balanced against the industry's and the investing public's need to have full and candid disclosure of wrongdoing by brokers.

The Court of Appeals concluded that the public's interests were paramount to the brokers' private interest in their reputation:

"The public interests implicated by the filing of Forms U-5 are significant. The form is designed to alert the NASD to potential misconduct and, in turn, enable the NASD to investigate, sanction and deter misconduct by its registered representatives. The NASD's actions ultimately inure to the benefit of the general investing public, which faces the potential for substantial harm if exposed to unethical brokers. Accurate and forthright responses on the Form U-5 are critical to achieving these objectives."

In support of its decision, the Court of Appeals noted that the NASD is a quasi-governmental entity. It regulates more than 5,000 brokerage firms and more than 660,000 registered securities representatives. Further, the NASD has been delegated authority to enforce the requirements of the Securities and Exchange Act of 1934 and is the primary regulator of the broker-dealer industry. Moreover, the court relied on the fact that one of the NASD's "central" responsibilities involves the investigation and adjudication of suspected violations of the SEC's laws and regulations as well as the NASD's own rules. The Form U-5, the court opined, plays a central role in the NASD's self-regulatory process because:

• Filing is mandatory within 30 days of termination of the registered representative and firms are subject to penalties should they fail to comply;
• Upon receipt of Form U-5, the NASD routinely investigates terminations for cause to determine whether the representative violated any securities rules;
• Form U-5 is often the first step in the NASD's quasi-judicial process;
• Form U-5 is an aid to prospective member employers to screen potential employees.

Based upon Form U-5's compulsory nature and the central role it plays in the NASD's quasi-judicial process, the Court of Appeals concluded that statements made by an employer on Form U-5 should be accorded an absolute privilege.

Conclusion and Caveats

The MetLife decision is a substantial victory for employers in the securities industry. Employers in New York no longer have to engage in hand wringing every time they fill out Form U-5, fearful that a candid response might subject them to liability. However, the victory should be tempered by several caveats:

• Member firms are not totally insulated from legal action relating to defamatory statements allegedly made on Form U-5. Registered employees who are in fact defamed may, under NASD rules, commence an arbitration or court action to expunge any alleged defamatory language included in Form U-5;
• Member firms could be subject to regulatory action if they have abused Form U-5's absolute privilege and used it for improper purposes;
• Member firms in jurisdictions outside New York may not take comfort in the MetLife decision because it has precedential value only in New York. Other jurisdictions may have already adopted the qualified privilege standard or some other standard when considering defamation claims in the Form U-5 context. Employers in the securities industry need to check state law in the jurisdiction where the Form U-5 defamation claim has been asserted;
• Finally, employers in the securities industry and employers generally will need to be vigilant and insure that they confine their stated reasons for termination to Form U-5. Statements made in Form U-5 when communicated to third parties or made in voluntary context will not carry the mantle of protection provided by the MetLife decision.