Tuesday, March 2, 2010

Judge Dismisses Suit Against FINRA for Misleading Members

I am still waiting for a copy of the decision, but according to InvestmentNews.com, Judge Rakoff of the SDNY has dismissed the suit brought by two member firms against FINRA for misleading its members in connection with the merger with NYSE Enforcement.

According to the article, Judge Rakoff held "SROs and their officers are absolutely immune from private damages suits challenging official conduct performed within the scope of their regulatory functions."

There are two obvious problems with this decision. First, FINRA consistently argues, when it suits its purpose, that it is not a government entity, and therefore the proscriptions on its conduct that would apply to a government entity do not apply to it's conduct. Second, the conduct had issue has little if anything to do with the regulatory function of FINRA, it was an organizational matter, and the material put forth to the members in order to vote on a proposal, was allegedly false.

I am certainly not an expert on governmental immunity, but it seems to me that the immunity issue arises, if at all, in connection with the regulatory function. For example, a broker cannot sue FINRA for misconduct in the course of an investigation. If FINRA is a government entity or actor, that is fine. Of course, if it is a government entity or actor, individuals appearing before it have a Fifth Amendment right, which we all know FINRA members do not have, because FINRA is not a government entity or actor. Alice, meet the looking glass.

But now we have a membership organization that has immunity for claims of lying to its membership in connection with a merger with another membership organization?

Something is wrong here. Something is very wrong.


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