When the brokerage industry proposed Rule 1150 to the Securities and Exchange Commission — to grant firms “qualified immunity” from defamation charges regarding remarks placed on U-5s — the NAIP immediately recognized that the regulation could be devastating to brokers. If passed, this rule would have given broker/dealers carte blanche to put inaccurate and defamatory remarks on your U-5 as you leave a firm. The effect, in my opinion, would be to severely limit your ability to move and dim your chances of getting a good upfront deal for bringing your business to a new shop. Broker/dealers, especially in this environment, will only pay top dollar for brokers with large books and clean records. (See related story on page 16).
We organized a letter-writing campaign to the SEC and to our congressional representatives and stopped approval of Rule 1150 in 1998. But we never heard from the SEC on the status of the rule, which we can assume is in “limbo.” We also assume that its backers are only waiting until conditions are right to revive it.
That time may be coming, thanks to efforts by the National Association of Securities Dealers, broker/dealer firms and the Securities Industry Association. They have been working for two years to remove an obstacle that the NAIP helped place in their way. We pointed out that the rule, as drafted, would superscede state defamation statutes and that helped convince the SEC to shelve it.
Since then, representatives from the firms, the NASD and the SIA have been attending meetings of the Drafting Committee on Uniform Securities Law (NCCUSL), which proposes language that the National Conference of (State) Commissioners uses to draw standardized regulations for states to adopt. The new Uniform Securities Act, now being drafted by a team of lawyers, state regulators and Professor Joel Seligman at Washington University of Law in St. Louis, includes the following language:
Section 507. Qualified Immunity A broker-dealer, agent, investment adviser, federal covered investment adviser, or investment adviser representative is not liable to another broker-dealer, agent, investment adviser, federal covered investment adviser, or investment adviser representative for defamation relating to an alleged untrue statement that is contained in a record required by the administrator or its designee unless it is shown by [clear and convincing evidence] that the person knew, or should have known at the time that the statement was made, that it was false in a material respect or the person acted in reckless disregard of the statement's truth or falsity.
Should the committee approve Section 507 it will be part of the new Uniform Code. It is then up to each state to approve it. Should a majority of states approve the new code, the SEC will most likely revive and approve Rule 1150.
It is no surprise to me that these industry groups would again propose a rule that includes an impossibly high burden of proof that an associated person must establish if he or she is defamed. The association wants the clear and convincing evidence standard because — despite its name — it is overly complicated, subject to misinterpretation by arbitrators, and almost impossible for a plaintiff to meet in a civil defamation case. Usually, the preponderance-of-evidence standard applies in civil litigations where money damages are at stake.
The intention of the drafters of the uniform state law, it is clear to me, is to “back-door” Rule 1150 into regulation. If you want to stop it, (before they severely limit your mobility in the industry), go to our Web site to get a copy of a letter called “State Regulators Stop Qualified Immunity!” Send this to your State Securities Commissioner immediately. As always, I am available to answer your questions on this complex issue. Please e-mail me at email@example.com.
T. Sheridan O'Keefe is president of the National Association of Investment Professionals. naip.com