The NASD has submitted to the SEC its controversial proposal to provide firms with an enhanced level of legal immunity from defamation claims arising from statements made on forms U-4 and U-5.
The NASD's Feb. 20 filing, received by the SEC Feb. 23, differs from an earlier draft in that it drops a 10-day advance notice provision for brokers as well as language relating to disclosing "complete" information on the forms. It also does not contain an idea floated in the initial draft that would have required a signatory on a U-4 or U-5 to be a registered person or a lawyer for enhanced immunity to apply.
However, the rule proposal sent to the SEC still contains controversial language that would set a new legal standard for bringing and proving defamation claims. The rule would shield a defending party (broker/dealers and managers) from liability if alleged victims couldn't show by a "clear and convincing" evidence standard that the defending party knew the statement was false at the time it was made, or acted in "reckless disregard" of the truth.
The NASDR received 53 comment letters by the end of last year, after it released the draft. One issue raised by many plaintiffs' attorneys as well as one brokerage firm--A.G. Edwards--is that the immunity rule would put the NASD in the position of acting as a lawmaker.
The NASD rule filing states, "For purposes of NASD arbitration the rule would supersede state law on [defamation]." Some states, the proposal notes, only require a lower "preponderance" of evidence standard for proving defamation.
"No one [evidence] standard is dominant" among states, the filing reads, so "The NASD has determined that the 'clear and convincing' standard provides a good balance. ..."
The rule filing does express concern that U-5s can be misused against brokers and promises that the NASD will "consider and investigate evidence of misuse of [U-4 and U-5] forms."
The immunity debate arose from several rogue broker sweeps, concluded in 1994. The SEC found that firms' disclosures were incomplete, and noted that dealers complained about the risk of defamation suits if full facts were given via the U-5. In its 1994 Large Firm Project (rogue broker) report, the SEC suggested that qualified, or partial, immunity from defamation claims might help improve disclosure.
The idea of increased immunity has been expanded to include not just U-5 statements, but U-4s and oral statements as well. U-4s have been covered because "members of the industry have indicated that required disclosures pertaining to employees on Form U-4 provide the same potential for liability," the NASD's rule filing states. Oral statements would be offered enhanced immunity "to the extent they track language that is already or later incorporated into" a U-4 or U-5.
The NASD board of governors approved the rule on Jan. 22, although the filing is dated Feb. 20. A March 6 announcement from the NASD says that the rule may still be amended after publication in the Federal Register. It remains unknown what version of the rule the NASD board voted on, and what changes might still be made.
Neither the SEC nor NASD would comment on the filing.