Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, April 28, 2014

Maslo on National Securities Exchanges

Paul Brian Maslo has posted Immunocompromised: A Call for Courts to Redefine the Boundaries of the Application of Absolute Immunity to National Securities Exchanges on SSRN with the following abstract:

Because of their status as self-regulatory organizations (“SROs”), courts have granted national securities exchanges absolute immunity from suit for money damages when they act within the scope of their regulatory and general oversight functions. When securities exchanges were member-owned nonprofits, primarily focused on regulation, application of the absolute-immunity doctrine was clear-cut. The doctrine’s application now requires a more nuanced approach because exchanges have evolved into for-profit businesses that compete directly with broker-dealers and have offloaded a substantial portion of their regulatory functions to the Financial Industry Regulatory Authority (“FINRA”).

As for-profit entities, securities exchanges undertake numerous business activities that are completely divorced from or only tangentially related to their role as regulators. Though courts have begun to recognize that exchanges wear two hats (i.e., business and regulatory) and carve out an exception from the absolute-immunity doctrine for activities that lie well outside exchanges’ general oversight functions, courts have not yet applied the commercial exception to activities that have some regulatory hook but are undertaken primarily for business reasons. Thus, under the commercial exception as currently fashioned, exchanges have absolute immunity for business activities, so long as they have some ancillary connection to the exercise of their regulatory powers. To remedy that problem, this article advocates extending the commercial exception to cover actions primarily taken to further exchanges’ business interests, regardless of whether they have some regulatory connection. Exchanges should not have absolute immunity when they are acting as for-profit market participants executing self-interested business decisions, only because those decisions relate, in some indirect way, to a regulatory function. Instead, courts should grant immunity to shield exchanges only when they are acting under the aegis of their delegated authority as market regulators.

To aid courts in identifying whether an activity is primarily regulatory or primarily commercial, this article proposes that, when addressing the application of absolute immunity to securities exchanges, courts carve out an exception from the line of precedents rejecting the consideration of motive in the immunity analysis. Considering motive may be the best way for courts to ferret out those activities that are primarily commercial (and not deserving of protection) in situations involving some regulatory component.

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