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Standard Investment Chartered, Inc., On Behalf of Itself and All v. National Association of Securities Dealers

February 22, 2011

STANDARD INVESTMENT CHARTERED, INC., ON BEHALF OF ITSELF AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFF-APPELLANT,
v.
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INCORPORATED, AKA NASD, NYSE GROUP, INC., MARY L. SCHAPIRO, RICHARD F. BRUECKNER, BABARA Z. SWEENEY, FINANCIAL INDUSTRY REGULATORY AUTHORITY, INCORPORATED, T. GRANT CALLERY, TODD DIGANCI AND HOWARD M. SCHLOSS, DEFENDANT-APPELLEES.



Appeal from an order of the United States District Court for the Southern District of New York (Rakoff, J.) granting Defendant-Appellees' Rule 12(b)(6) motion to dismiss.

Per curiam.

10-945

Standard Investment Chartered, Inc. v. NASD

Submitted: February 11, 2011

Before: POOLER and HALL, Circuit Judges, COGAN, District Judge.*fn1

This case arises out of the consolidation of the National Association of Securities Dealers, Inc. ("NASD") with the regulatory arm of the New York Stock Exchange ("NYSE"), which resulted in the formation of the Financial Industry Regulatory Authority ("FINRA"). The district court held that Defendant-Appellees, which are self-regulatory organizations ("SROs"), and their officers were absolutely immune from private damages suits based upon alleged misstatements in a proxy solicitation that altered the bylaws of the NASD in connection with the creation of FINRA. As the district court explained, the bylaw amendments were incident to the regulatory function of the SROs insofar as they were a necessary prerequisite for consolidation, and amendment of the bylaws falls squarely within SRO statutory rulemaking authority as delegated by the SEC. We affirm.

AFFIRMED.

Appeal from an order of the United States District Court for the Southern District of New York (Rakoff, J.) granting Defendant-Appellees' Rule 12(b)(6) motion to dismiss. This case arises out of the consolidation of the National Association of Securities Dealers, Inc. ("NASD") with the regulatory arm of the New York Stock Exchange ("NYSE"), which resulted in the formation of the Financial Industry Regulatory Authority ("FINRA"). The district court held that Defendant-Appellees, which are self-regulatory organizations ("SROs"), and their officers were absolutely immune from private damages suits based upon alleged misstatements in a proxy solicitation that altered the bylaws of the NASD in connection with the creation of FINRA. As the district court explained, the bylaw amendments were incident to the regulatory function of the SROs insofar as they were a necessary prerequisite for consolidation, and amendment of the bylaws falls squarely within SRO statutory rulemaking authority as delegated by the SEC. We affirm.

BACKGROUND

Plaintiff-Appellant Standard Investment Chartered, Inc. ("Standard") is a California Corporation that was a member of the National Association of Securities Dealers Inc. ("NASD") at all times relevant to this lawsuit. Defendant-Appellees are the NASD and the former regulatory arm of the New York Stock Exchange ("NYSE")--the NYSE Group, Inc., as well as several NASD officers. NASD and NYSE Group, Inc. are SROs registered with the Securities and Exchange Commission ("SEC") as national securities associations pursuant to the Securities Exchange Act of 1934 ("Exchange Act").

The complaint alleges that NASD and its officers made misstatements in connection with a proxy solicitation in 2006 through which NASD sought to amend its bylaws to make them consonant with those of NYSE Group, Inc. so that the two entities could become one. Until NASD and NYSE Group, Inc. consolidated to form the Financial Industry Regulatory Authority, Inc. ("FINRA"), they each regulated separate markets, which meant, among other things, that the 170 broker-dealers belonging to both bodies were subject to two different sets of regulations that sometimes interacted in contradictory and confusing ways.

The consolidation was structured as an asset purchase agreement whereby NASD would acquire certain assets of NYSE Group, Inc. As a condition to closing, NASD was required to amend its bylaws, including by implementing a new voting regime--the NASD's "one member, one vote" system would be replaced with a voting structure that distributed votes based upon the size of the member firm. The proxy solicitation also provided for a one-time "special member payment" of $35,000. Standard alleges that Defendant-Appellees misrepresented that $35,000 was the maximum possible payment that could be made.

On January 19, 2007, NASD's members voted in favor of the bylaw changes and the proposed amendments were sent to the SEC for approval, which is required by Section 19 of the Exchange Act and Rule 19b-4 promulgated thereunder. The SEC published the rules for public comment on March 20, 2007, see Exchange Act Release No. 55495, 90, SEC Docket No. 641 (Mar. 20, 2007), and ultimately approved them on July 26, 2007. Four days later, the consolidation became effective and FINRA was created.

Shortly before the SEC published the proposed bylaw changes for public comment, Standard commenced this lawsuit, which was dismissed on March 1, 2010, on the ground that Defendant-Appellees, as quasi-governmental organizations (and officers of such), were entitled to absolute immunity for their involvement in the proxy solicitation. The district court concluded that the proxy was incident to ...


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