In a significant ruling for the financial services industry, the Pennsylvania Superior Court ruled on a dispute involving allegedly defamatory regulatory filings by Bryan Advisory Services, LLC (“BAS”) against two financial advisors. This case raised a serious question as to whether courts, rather than FINRA, has the authority to preside over disputes involving FINRA registration forms. The case, Constantakis v. Bryan Advisory Services, LLC, centered on Uniform Termination Notices (U5 Forms) and an Investment Adviser Public Disclosure (IAPD) filed by BAS that accused the advisors of fraudulent conduct. The U5 Forms are generally not publicly available, but they are available to prospective employers. The trial court found these filings to be “reckless, and potentially malicious” and devoid of any factual basis.
Despite BAS’s argument that such disputes fall under FINRA’s jurisdiction, as many of these disputes are subject to mandatory FINRA arbitration, the Pennsylvania Superior Court upheld the trial court’s determination, in part because this case was about correcting unsubstantiated public filings that were devastating to the plaintiffs’ careers. The court noted, “Unlike in [prior cases], the Form U5s and the IAPD do not merely exhibit [defendants’] opinion regarding [plaintiffs’] professional integrity. In this case, [defendants’] filing … also impact [plaintiffs’] very livelihoods and their ability to work in the investment industry in any capacity.”
The court specifically analyzed whether the Form U5s are subject to an absolute privilege or a conditional privilege. An absolute privilege gives the employer immunity from litigation for making false statements, and a conditional privilege protects employers only when their false statements were made in good faith or with reasonable care. The court did not decide conclusively the level of privilege allowed to employers, but said: “We conclude Appellees have established a likelihood that the trial court in this matter would apply a conditional rather than absolute privilege. We further believe that Appellees have produced sufficient evidence to overcome the conditional privilege by a showing of negligence on the part of Appellants.” Other states, like New York, have an absolute immunity for Form U5’s that allow employees who are defamed to commence an arbitration or court action to expunge the defamatory language. It is uncertain whether this ruling will be followed or be persuasive outside of Pennsylvania, however, as each state would need to make its own independent determination.
The Superior Court also found that requiring BAS to amend its filings with neutral language did not amount to unconstitutional prior restraint, as it addressed past conduct rather than prohibiting future speech. Plaintiffs’ request for a jury trial was also supported by Pennsylvania’s Constitution. Article I, Section 6 of the Constitution explicitly aims to “[secure] the right of trial by jury before rights of person or property are finally determined.”
Matters involving U5’s always implicate defamation, which inherently involves matters of “reputation and livelihoods.” Thus, it remains unclear whether this case will infringe upon FINRA’s authority over such issues. This ruling makes it so Pennsylvania employers who are filing U5 forms should be careful to ensure the filings are accurate, and if they are critiquing the employee, to ensure that the language they use in the filing is in good faith.
