Reducing Defamation Risk From FINRA Form U5

By Seth D. Berlin, Ivan B. Knauer, Jacquelyn N. Schell, and Omarr K. Rambert
June 21, 2021

There has been increasing concern about defamation cases against financial institutions based on statements made in Uniform Termination Notices for Securities Industry Registration (Form U5), required by the Financial Industry Regulatory Authority (FINRA) after the departure of registered representatives. We write to highlight these cases, possible defenses you may have, and recommendations for avoiding litigation where possible.

Obligation to File Form U5

FINRA requires that firms file Form U5 when a registered representative leaves for any reason, including resignation, voluntary departure, or discharge. Form U5 serves to terminate the departing representative’s association with that firm and also allows FINRA and other regulatory organizations to monitor investigations into these individuals and potential disciplinary matters.

On Form U5, firms must disclose the reasons for the individual’s departure; state whether the individual has been the subject of internal investigations, civil litigations, or criminal or regulatory investigations relating to his or her work; and, if so, provide additional information about those investigations. Firms provide Form U5 to the individual and to FINRA, which then maintains copies of the forms in its Central Registration Depository.

Form U5 Defamation Claims

Not surprisingly, individuals often dispute the disclosures made by their former firms, particularly in contentious or involuntary departures. Increasingly, these individuals are filing defamation claims based on statements made in the Form U5, often in conjunction with breach of contract or employment discrimination claims related to their departure. 

Despite that risk, firms nevertheless are required to provide truthful, complete disclosures on Form U5, particularly given the importance of these forms to FINRA in monitoring and investigating potential misconduct. So, the question arises: how can firms protect themselves against defamation threats when making mandatory disclosures about an employee who may dispute the disclosures or prefer to keep them out of public records maintained by FINRA?

Defenses to U5 Defamation Claims

Many states provide at least some level of protection for statements made in Form U5, but the scope and strength of these defenses vary considerably.

Absolute Privileges

In New York, statements made in a Form U5 are protected by an absolute privilege—that is, they cannot be the basis of a defamation claim under any circumstances. New York courts recognized the importance of these disclosures in 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 N.Y.3d 359, 367-68 (2007):

The public interests implicated by the filing of Forms U-5 are significant. The form is designed to alert [FINRA] to potential misconduct and, in turn, enable [FINRA] to investigate, sanction and deter misconduct by its registered representatives. [FINRA]’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 concluding that statements in a Form U5 are privileged, the court also relied on the fact that filing the form is mandatory and that firms can be subject to penalties for failure to provide truthful information.  Id.

California courts also have ruled that statements in Form U5 are privileged under California Civil Code § 47(b), which immunizes publications in “judicial, legislative, or other official proceedings,” so long as they relate to FINRA’s enforcement and rules. As one appellate court explained, “[w]hen the Form U5 identifies allegations of improper conduct by a broker-dealer, an issue that FINRA may need to investigate, it can on those occasions be considered a communication made in anticipation of the bringing of an action or other official proceeding,” which is deemed absolutely privileged under Section 47(b). Tilkey v. 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 U.S. Dist. LEXIS 33712, at *16 (N.D. Cal. Sept. 6, 2005) (extending privilege to Form U5 because it is or can be a “precursor to an investigation”). 

However, even though mandatory disclosures and related explanations are absolutely privileged, the privilege does not extend to voluntary disclosures or disclosures that address issues that are not within FINRA’s purview—for example, statements that the broker-dealer had been terminated for threatening behavior or physical harm. See Tilkey, 56 Cal. App. 5th at 545-47.

The largely absolute privileges available in New York and California do not prevent plaintiffs from filing suit, but they should provide a clear basis for courts to dismiss claims at the earliest opportunity and may be helpful in discouraging former employees from bringing these claims.

Conditional Privileges

Several other states provide conditional or qualified privileges for statements made in Form U5. Such privileges protect statements made in good faith and without “actual malice,” a term of art that does not refer to traditional malice or ill will, but instead refers to knowledge of a statement’s falsity. In those jurisdictions, the only way for an individual to bring a successful U5 defamation suit is to overcome the privilege, usually by proving that the firm knew the disputed statement was probably false, yet included it anyway. 

These conditional privileges should provide strong defenses as well. However, just as courts have limited California’s absolute privilege to statements in the Form U5 itself, states recognizing a conditional privilege typically do not extend the privilege to statements made outside of the Form U5, such as press statements or client alerts, because those 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 goals. Firms should therefore take extra care in light of the additional defamation risk from press releases, internal messaging about departures, and other communications outside of the mandatory filings.

Anti-SLAPP Laws

Depending on the state, firms may also have the benefit of “Anti-SLAPP” laws, designed to deter “Strategic Lawsuits Against Public Participation”—frivolous lawsuits intended to deter speech on matters of public concern. Some thirty states now have Anti-SLAPP laws on the books, though the laws vary widely in reach and scope, as well as available remedies. 

These state laws may increase a plaintiff’s evidentiary burden, create procedural mechanisms for early disposition of SLAPP suits, and, in many instances, allow successful defendants to recover their attorneys’ fees and costs. See, e.g., Cal. Civ. Proc. Code § 425.16; N.Y. Civ. Rights Law § 76-a.

Given that courts consistently have ruled that Form U5 serves an important public purpose, firms may be able to avail themselves of Anti-SLAPP laws in states where they exist, both as an additional defense or remedy in litigation and, especially where they authorize the recovery of attorneys’ fees, as a means of discouraging threatened suits before they are filed. See, e.g., Fontani v. Wells Fargo Invs., LLC, 129 Cal. App. 4th 719, 731-32 (2005) (applying California Anti-SLAPP statute and striking U5 defamation claim), disapproved on other grounds in Kibler v. N. Inyo Cnty. Local Hosp. Dist., 39 Cal. 4th 192, 203 n.5 (2006); Arges v. LPL Fin., LLP, No. D076790, 2020 Cal. App. Unpub. LEXIS 7797, at *23 (Nov. 24, 2020) (affirming dismissal of U5 defamation claim and awarding attorneys’ fees and costs, based on Anti-SLAPP statute). 

How Can Firms Manage Exposure?

Some recommended steps for firms preparing Form U5 filings:

  • Have experienced legal counsel review both the Form U5 and any associated communications for defamation concerns in addition to employment and regulatory concerns.
  • Involve counsel immediately upon receipt of any defamation threats, to evaluate any state-specific defenses and to advise on asserting them in pre-litigation negotiations (including because certain of them can be waived if not asserted promptly).
  • Involve experienced defamation counsel, familiar with the privileges and defenses available, in defending any proceedings asserting defamation arising out of a Form U5 or related communications.

How Ballard Spahr Can Help

As you know, Ballard Spahr regularly advises financial institutions on regulatory compliance matters, but, unlike other firms, we are also home to one of the premier First Amendment and defamation litigation teams in the country. Our Media and Entertainment group regularly advises clients—not only major media clients, but also financial institutions, corporations, and individuals—on minimizing defamation risks and defends clients against defamation and related claims, should they arise. We are also leaders in the use of state Anti-SLAPP statutes in response to defamation claims, frequently obtaining not only dismissals but awards of our clients’ attorneys’ fees and costs. Given that U5 claims raise issues unique to the tort of defamation, our team of specialists is available both to advise on minimizing risk in drafting Form U5 submissions and to respond to claims or lawsuits that your company may encounter.

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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