The National Association of Securities Dealers (NASD) has "members" which are entities that sell securities and may be banks or brokerages. These members employ "licensees" who NASD licenses as stockbrokers and other types of securities salespeople. When a member terminates the employment of a licensee, the member must complete a form U-5. The form U-5 is subject to review by all future employers and claims contained in it may render the licensee unemployable.
Form U-5 "Uniform Termination Notice for Securities Industry Registration" requires that members (bank, or securities firm) indicate one of five reasons for terminating a NASD licensee (e.g. a stockbroker):
If the member indicates one of the last three reasons, it must provide an explanation. Additionally, regardless of the reason for termination, the member also must indicate whether the registered person/licensee/employee during the period of his or her association with the member, was involved in disciplinary action, the subject of a customer complaint, convicted of certain crimes, or under investigation or internal review.
Over the past ten years, licensees like stockbrokers have brought defamation claims for untrue or misleading statements members made on Form U-5. A derogatory term on the U-5 report can render a licensee unemployable and destroy his career.
FINRA (Financial Industry Regulatory Authority) is an association that regulates NASD members through the promulgation and enforcement of regulations. FINRA has regulatory oversight over all securities firms that do business with the public, as well as those offering professional training, testing and licensing of registered persons, arbitration and mediation, market regulation by contract for the New York Stock Exchange, the NASDAQ Stock Market, Inc., the American Stock Exchange LLC, and the International Securities Exchange, LLC; and industry utilities, such as Trade Reporting Facilities and other over-the-counter operations.
U-5 defamation disputes can take two tracks, an arbitration claim with FINRA, or a defamation claim in the state or federal courts. Because the U-5 is a required regulatory disclosure that is made for an important public purpose, a defamation suit brought in state or federal court may be subject to an anti-SLAPP motion that can result in the case being denied and expensive legal fees and court costs being imposed on the licensee who brought the suit.
U-5 arbitration through FINRA carries the possibility of removing the derogatory terms from the licensee's U-5 report, but FINRA arbitrators tend not to award damages unless the licensee bringing the action has a particularly large book of business and proves some real losses. The standard in state and federal court for defamation regarding a person's fitness for her profession or occupation is "per se" with presumed damages.
U-5 defamation cases are complex and present important choices about where to bring the claim based on what goals are most important to the client including the ability to enjoy future employment in the profession, the likelihood of a damage award and the likely amount of any award.
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