Standard Investment Chartered v. FINRA: A Defeated Challenge to Absolute Immunity

In Standard Investment Chartered, Inc., v. FINRA, No. 07 Civ. 2014 (JSR) (S.D.N.Y. Mar. 1, 2010), Standard Investment Chartered, Inc., (“Standard”) and Benchmark Financial Services (“Benchmark”), allege officials in the National Association of Securities Dealers (“NASD”) made material misrepresentations in the proxy statement for the consolidation of NASD & the regulatory division of NYSE into FINRA.  At the time of the formation of FINRA, both Standard and Benchmark were members of NASD.  The court dismissed both plaintiffs’ complaints claiming that FINRA was entitled to absolute immunity from private lawsuits asserting misconduct in a regulatory function. 

Under the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a-78oo, the SEC can delegate certain regulatory roles to self-regulating organizations, such as FINRA.  These self-regulating organizations are considered “quasi-governmental bodies.” As such, these organizations and their officers are absolutely immune from private lawsuits that challenge conduct executed in a regulatory capacity.  Absolute immunity does not pertain to functions performed in a proprietary capacity.  The line between these functions is not always an easy one to draw.  See Race to the Bottom's previous post on Weissman. 

Both Standard and Benchmark claimed that the self-regulating organizations were acting in a proprietary capacity when it made alleged material misstatements in the proxy statement when asking members to approve by-law amendments.  Specifically, Standard and Benchmark’s complaints alleged that NASD’s by-law amendments made material misrepresentations about the maximum amount the IRS permited the NASD to pay its members in accordance with the merger.  Standard and Benchmark claimed the by-law amendments falsely stated that the most NASD could pay members in connection with the merger was $35,000.  The by-law amendments required shareholder approval for the merger to succeed.  In February, the court denied a motion to unseal financial records between the IRS and NASD. 

Since the by-law amendments contained financial information, Standard and Benchmark contend that FINRA was acting in a financial capacity which differs from a regulatory capacity.  The court called this argument “artificial and unconvincing.” 

Finding that by-law amendments are considered a part of regulatory functions, the court held that FINRA had absolute immunity against Standard and Benchmark’s lawsuits.  The court granted FINRA’s motions to dismiss against both Standard and Benchmark.  Both lawsuits were dismissed with prejudice.  The court did not hear FINRA’s other arguments. 

The primary materials for this case may be found on the DU Corporate Governance Website.