By MICHAEL SMALLBERG
Should a private organization that's acting with quasi-governmental authority—such as the Financial Industry Regulatory (FINRA)—enjoy the same kind of sovereign immunity that applies to government agencies, even when the organization is sued for misconduct related to its private business?
POGO signed on to an amicus brief this week asking the Supreme Court to take up this very question. We joined Public Citizen, Consumer Action, and U.S. Public Interest Research Group (PIRG) in signing on to the brief, which was written and submitted by Public Citizen’s Litigation Group.
The case in question involves a deal that led to the creation of FINRA, the self-regulatory organization (SRO) for the securities industry. FINRA was formed in 2006-2007 when the National Association of Securities Dealers (NASD) acquired the regulatory arm of the New York Stock Exchange (NYSE). The deal required an amendment to NASD’s bylaws that would increase the voting power of the organization’s larger member firms, and was therefore subject to a vote by NASD’s members. After the deal was approved, one of NASD’s smaller member firms, Standard Investment Chartered, Inc., filed a lawsuit alleging that NASD’s proxy statement seeking approval of the deal was fraudulent.
Standard’s lawsuit brings up the issue of sovereign immunity, which generally protects federal, state, and tribal governments from lawsuits that could subject them to monetary liabilities. In contrast to the immunity available to sovereign entities as a whole, certain officials are entitled to absolute immunity, but only for performing sensitive functions such as legislating, adjudicating, and prosecuting. In other words, absolute immunity is based on the specific function performed by the government official, whereas sovereign immunity applies more broadly to federal, state, and tribal governments.
Courts have historically extended absolute immunity to non-governmental individuals who perform functions such as judging and prosecuting, but only to the extent that they perform these functions. In keeping with this principle, the Fifth Circuit has extended absolute immunity to NASD and other SROs, but only in cases where they perform prosecutorial and adjudicatory functions.
Over the years, however, courts have vastly expanded SRO immunity. Some courts began to liken SRO immunity to sovereign immunity, focusing on SROs’ status as quasi-governmental regulators. Other courts granted SROs immunity even in cases when they weren’t performing strictly prosecutorial or adjudicatory functions, as long as they were acting in a quasi-governmental capacity.