Ghost of Qualified Immunity Rises

Securities firms are pushing states to give them more legal protection from employment claims.A 1997 NASD rule proposal giving firms "qualified immunity" from broker defamation claims arising from U-4 and U-5 disclosures has been quietly buried by the SEC. So the industry has instead gotten the rule inserted into draft language revising the uniform securities acts (USA), which are model state laws.The

Securities firms are pushing states to give them more legal protection from employment claims.

A 1997 NASD rule proposal giving firms "qualified immunity" from broker defamation claims arising from U-4 and U-5 disclosures has been quietly buried by the SEC. So the industry has instead gotten the rule inserted into draft language revising the uniform securities acts (USA), which are model state laws.

The draft picks up the same legal language from the NASD proposal. Specifically, a broker would have to show by "clear and convincing evidence" that an alleged defaming statement "was false in any material respect" at the time it was made and that the firm "acted in reckless disregard" for the truth.

Securities firms and the NASD argue that the rule is needed to improve disclosure of bad brokers. Brokers and plaintiffs' attorneys have argued that the qualified immunity idea is simply an attempt to gain more legal protection, and that fear of customer suits and regulatory inquiries prevents firms from making full disclosures.

The NASD and the SIA are now arguing that the SEC had problems with the proposed rule's pre-emption of state defamation law. Therefore, they say the proposal should be added to the USA.

But T. Sheridan O'Keefe, president of the National Association of Investment Professionals, is urging the drafting committee to remove the language, claiming there was never any justification for it.

Meanwhile, the North American Securities Administrators Association, the state regulators group, remains neutral on whether qualified immunity should be included in a USA draft.

SEC representatives gave a status report to the drafting committee. The agency "didn't object" to the committee adding the qualified immunity language, an SEC spokesperson says.

The current USA draft also raises again the idea of giving firms absolute immunity for U-4 and U-5 disclosures. However, the SEC rejected absolute immunity for broker/dealers several years ago.

The drafting committee is also considering dropping the qualified immunity language altogether, at least until the SEC approves the NASD rule.

The uniform securities acts (USA) draft can be seen at www.law.upenn.edu/bll/ulc/ulc_frame.htm.

The qualified immunity language is contained in Section 507. The draft also includes proposed changes to publicly disclosable CRD information in Section 606.

Brokers wishing to comment on the draft should contact Joel Seligman, reporter, Drafting Committee to Revise Uniform Securities Acts, Washington University School of Law, Campus Box 1120, 1 Brookings Drive, St. Louis, MO 63130; and Richard Smith, chair, Davis Polk & Wardwell, 450 Lexington Ave., New York, NY 10017. E-mails can be directed to [email protected] and [email protected]

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