Austin Mun. Securities, Inc. v. National Ass'n of Securities Dealers, Inc., No. 84-1237

CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)
Writing for the CourtBefore CLARK, Chief Judge, WISDOM, and HIGGINBOTHAM; CLARK
Citation757 F.2d 676
PartiesFed. Sec. L. Rep. P 92,027, 1985-1 Trade Cases 66,550, 2 Fed.R.Serv.3d 93 AUSTIN MUNICIPAL SECURITIES, INC., et al., Plaintiffs-Appellees, v. NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., et al., Defendants- Appellants.
Docket NumberNo. 84-1237
Decision Date15 April 1985

Page 676

757 F.2d 676
Fed. Sec. L. Rep. P 92,027, 1985-1 Trade Cases 66,550,
2 Fed.R.Serv.3d 93
AUSTIN MUNICIPAL SECURITIES, INC., et al., Plaintiffs-Appellees,
v.
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., et al.,
Defendants- Appellants.
No. 84-1237.
United States Court of Appeals,
Fifth Circuit.
April 15, 1985.

Page 679

Miller, Keeton Bristow, Richard P. Keeton, Michael M. Wilson, Gerald J. Brown, Houston, Tex., Frank J. Wilson, Andrew McR. Barnes, Washington, D.C., for defendants-appellants.

Anne E. Chafer, Linda D. Fienberg, Washington, D.C., for amicus curiae S.E.C.

Byrd, Davis & Eisenberg, L. Tonnett Byrd, Spivey & Grigg, Broadus A. Spivey, Paul E. Knisely, Austin, Tex., for plaintiffs-appellees.

Appeal from the United States District Court for the Western District of Texas.

Before CLARK, Chief Judge, WISDOM, and HIGGINBOTHAM, Circuit Judges.

CLARK, Chief Judge:

I

On this interlocutory appeal we hold that the National Association of Securities Dealers, Inc. (NASD) and its disciplinary officers have absolute immunity from further prosecution for personal liability on claims arising within the scope of their official duties; that the legislation authorizing the NASD disciplinary process implicitly repeals inconsistent provisions of the antitrust laws; and that the district court must stay proceedings pending arbitration for all arbitrable claims, despite the presence of intertwining nonarbitrable issues. We vacate the judgment of the district court and remand for further proceedings in light of the principles discussed in this opinion.

II

Our analysis must begin with an overview of the regulatory framework governing the NASD disciplinary process. The NASD is a nonprofit Delaware corporation registered with the Securities and Exchange

Page 680

Commission (SEC) as a national securities association, pursuant to the Maloney Act, 52 Stat. 1070 (1938), 15 U.S.C. Secs. 78o -3, et seq., amending the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. Sec. 78a, et seq.

The Exchange Act provides a comprehensive system of federal regulation of the securities industry. As an integral part of that system, the Maloney Act established extensive guidelines for the formation and oversight of self-regulatory organizations, such as the NASD, and the registered stock exchanges, including the New York Stock Exchange (NYSE) and the American Stock Exchange. Congress delegated power to these organizations to enforce, at their own initiative, "compliance by members of the industry with both the legal requirements laid down in the Exchange Act and the ethical standards going beyond those requirements." Merrill Lynch, Pierce, Fenner & Smith, Inc. v. National Association of Securities Dealers, Inc., 616 F.2d 1363, 1367 (5th Cir.1980), quoting S.Rep. No. 94-75, 94th Cong., 1st Sess. 23 (1975), 1975 U.S.Code Cong. & Ad.News 179, 201.

To prevent the misuse of this Congressionally-mandated power, Congress granted the SEC broad supervisory responsibilities over these self-regulatory organizations. First, an organization may not become a registered securities association unless its by-laws and rules conform to the Exchange Act. 15 U.S.C. Sec. 78o -3(b). The NASD met this requirement in National Association of Securities Dealers, Inc., 5 S.E.C. 627 (1939).

The registered association is also subject to extensive oversight, supervision, and control by the SEC on an ongoing basis. 15 U.S.C. Sec. 78s(a)(3)(B). With limited exceptions not relevant here, the SEC must approve all association rules, policies, practices, and interpretations prior to their implementation. 15 U.S.C. Sec. 78s. These rules may not impose any burden on competition not necessary or appropriate to further the purposes of the Exchange Act. 15 U.S.C. Sec. 78o -3(b)(9). In addition, the SEC may abrogate or add such rules as it deems necessary, if consistent with the requirements of the Exchange Act. 15 U.S.C. Sec. 78s.

Every self-regulatory organization must comply with the provisions of the Exchange Act, its own rules, and the rules of both the SEC and Municipal Securities Rulemaking Board (MSRB). 15 U.S.C. Sec. 78s(g)(1). Furthermore, these organizations must force compliance with these rules by their members and persons associated with members. 15 U.S.C. Sec. 78s(h).

If an organization, member, or associate fails to comply with these requirements, the SEC has broad sanctioning power. The SEC can suspend or revoke the registration of the self-regulatory organization, or censure or restrict the activities, functions, and operations of the organization, a member, or an associate. Merrill Lynch, 616 F.2d at 1367. The SEC may remove from office or censure any officer or director of a self-regulatory organization if it finds she has wilfully violated the rules or abused her position. 15 U.S.C. Sec. 78s(g)(2). Finally, the SEC may bring an action to enjoin any activity by the organization that violates the Exchange Act or rules promulgated thereunder. 15 U.S.C. Sec. 78u(d). See Merrill Lynch, 616 F.2d at 1367.

The Maloney Act specifies certain procedural safeguards for the self-regulatory organization's disciplinary process. The organization must "bring specific charges, notify such member or person of, and give him an opportunity to defend against, such charges, and keep a record." 15 U.S.C. Sec. 78o -3(h)(1). Any sanction imposed must be supported by a statement of the Act which constituted the violation, the specific provision or rule violated, the sanction imposed, and the reasons therefor. Id. The SEC closely scrutinizes the disciplinary process and must be satisfied the rules provide a fair procedure for disciplinary hearings. 15 U.S.C. Secs. 78o -3(b)(8), 78s(b)(1), (2).

In Merrill Lynch, we discussed how the NASD has complied with these requirements regarding its disciplinary process:

Page 681

In response to these statutory guidelines, the NASD has established detailed rules for the handling of disciplinary matters concerning its members. Upon initiation of a complaint against an NASD member, either by a member of the public or the association itself, a hearing is held before one of thirteen District Business Conduct Committees. NASD Code of Procedure for Handling Trade Practice Complaints, NASD Manual Secs. 3003, 3004. The written decision of the local committee is then reviewed by the National Business Conduct Committee of the NASD. NASD Manual Sec. 3014 (Explanation by the Board of Governors). The National Committee may then vote for further review by the Board of Governors of the NASD, or such review may be instigated on the motion of the aggrieved party or the Board of Governors itself. NASD Manual Sec. 3014. Appeal by the aggrieved party to the Board of Governors is a right, not affected by the vote of the National Committee. Id. The written conclusions of the Board of Governors must then be filed with the SEC, which may review the matter on its own motion or on the motion of any aggrieved person. 15 U.S.C. Sec. 78s(d)(1), (2). The SEC is authorized to affirm or modify any sanction, or to remand to the NASD for further proceedings. 15 U.S.C. Sec. 78s(e)(1), (2). An appeal may then be had to the United States Court of Appeals. 15 U.S.C. Sec. 78y(a).

616 F.2d at 1367. In short, "the NASD plays an important role in a complex self-regulatory scheme carefully set down by Congress. The self-regulatory power of the NASD is broad, but so is the range of administrative remedies Congress has provided for those aggrieved by NASD action." Id. at 1368.

This appeal focuses on the acts and responsibilities of the District Business Conduct Committees (DBCC's) in disciplining members of the NASD and their associates. The committee members who serve on the DBCCs are elected to office by the membership of the NASD in each district for a three year term. NASD Manual (CCH) paragraphs 1410, 1411. Because these officers serve without pay for their work on the DBCC, they may continue to engage in their pecuniary investment activities during their tenure on the committee. Id. at p 1456.

Members of the NASD staff assist the DBCC by performing investigative work, but the DBCC determines whether to prosecute a member or associate. The DBCC therefore acts as both the "prosecutor" and "adjudicator" in the disciplinary proceedings. The NASD has established detailed regulations governing the disciplinary process, outlined in the NASD Code of Procedure for Handling Trade Practice Complaints, reprinted in, NASD Manual paragraphs 3001-26.

III

The parties have stipulated, that for the purposes of this review of the district court's denial of defendants' motion for summary judgment, we should assume as true the allegations contained in plaintiffs' First Amendment Complaint. The plaintiffs consist of Austin Municipal Securities, Inc. and five of its associates. These associates were either registered principals or representatives of Austin during the relevant period, and all were the subject of discipline by the DBCC. (Plaintiffs are sometimes collectively referred to as "Austin.")

The twenty-three defendants can be categorized into three groups. First, plaintiffs sued each of the eleven DBCC members that prosecuted and adjudicated Austin's case. 1 Second, plaintiffs complained of the NASD, its District Director, Walker, and the NASD investigator who worked on the

Page 682

case, Benton. Finally, plaintiffs sued the investment securities firms that employed each of the DBCC members.

Austin Municipal Securities, Inc. was formed in 1975 as a registered broker/dealer in municipal securities, pursuant to 15 U.S.C. Sec. 78o -4(a)(2). Austin became a member of the NASD in order to participate in the over-the-counter securities market on a preferential basis. See 15 U.S.C. Sec. 78o -3(e).

Austin engaged exclusively in the purchase and sale of municipal bonds, specializing in the investment needs of Texas banks and bankers. By 1978, Austin had captured a...

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82 practice notes
  • Rabin v. NASDAQ OMX PHLX LLC, CIVIL ACTION No. 15-551
    • United States
    • United States District Courts. 3th Circuit. United States District Court (Eastern District of Pennsylvania)
    • April 21, 2016
    ...employees performing functions that were "characteristic of the judicial process." Austin Mun. Sec., Inc. v. Nat'l Ass'n of Sec. Dealers, 757 F.2d 676, 688 (5th Cir.1985). In recognizing such a defense, the Fifth Circuit limited its application to circumstances where "sufficient safeguards ......
  • Mayo v. Dean Witter Reynolds, Inc., No. C-01-20336JF (PVT).
    • United States
    • United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Northern District of California
    • April 22, 2003
    ...and control by the SEC on an ongoing basis. See 15 U.S.C. § 78s; Austin Mun. Securities, Inc. v. Nat'l Ass'n of Securities Dealers, Inc., 757 F.2d 676, 680 (5th The Exchange Act directs SROs to adopt rules and by-laws that conform with the Exchange Act. See 15 U.S.C. §§ 78f(b), 78o-3(b). Wi......
  • Billing v. Credit Suisse First Boston Ltd., Docket No. 03-9284L.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
    • September 28, 2005
    ...as anticompetitive. See NASD, 422 U.S. at 730-33, 95 S.Ct. 2427; see also Austin Mun. Sec., Inc. v. Nat'l Assoc. of Sec. Dealers, Inc., 757 F.2d 676, 694-95 (5th Cir.1985); cf. In re Stock Exchs. Options Trading Antitrust Litig., 317 F.3d at But "pervasive regulation" may also be derivative......
  • Johnson v. Kegans, No. 87-2352
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • April 24, 1989
    ...the National Association of Securities Dealers, Inc. and its disciplinary officers, Austin Mun. Securities v. Nat. Ass'n of Securities, 757 F.2d 676, 689-92 (5th Cir.1985), and members of pardon and parole boards, Cruz v. Skelton, 502 F.2d 1101, 1101-02 (5th Cir.1974) (per curiam); Johnson ......
  • Request a trial to view additional results
81 cases
  • Rabin v. NASDAQ OMX PHLX LLC, CIVIL ACTION No. 15-551
    • United States
    • United States District Courts. 3th Circuit. United States District Court (Eastern District of Pennsylvania)
    • April 21, 2016
    ...performing functions that were "characteristic of the judicial process." Austin Mun. Sec., Inc. v. Nat'l Ass'n of Sec. Dealers, 757 F.2d 676, 688 (5th Cir.1985). In recognizing such a defense, the Fifth Circuit limited its application to circumstances where "sufficient safegu......
  • Mayo v. Dean Witter Reynolds, Inc., No. C-01-20336JF (PVT).
    • United States
    • United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Northern District of California
    • April 22, 2003
    ...and control by the SEC on an ongoing basis. See 15 U.S.C. § 78s; Austin Mun. Securities, Inc. v. Nat'l Ass'n of Securities Dealers, Inc., 757 F.2d 676, 680 (5th The Exchange Act directs SROs to adopt rules and by-laws that conform with the Exchange Act. See 15 U.S.C. §§ 78f(b), 78o-3(b). Wi......
  • Billing v. Credit Suisse First Boston Ltd., Docket No. 03-9284L.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (2nd Circuit)
    • September 28, 2005
    ...as anticompetitive. See NASD, 422 U.S. at 730-33, 95 S.Ct. 2427; see also Austin Mun. Sec., Inc. v. Nat'l Assoc. of Sec. Dealers, Inc., 757 F.2d 676, 694-95 (5th Cir.1985); cf. In re Stock Exchs. Options Trading Antitrust Litig., 317 F.3d at But "pervasive regulation" may also be ......
  • Johnson v. Kegans, No. 87-2352
    • United States
    • United States Courts of Appeals. United States Court of Appeals (5th Circuit)
    • April 24, 1989
    ...the National Association of Securities Dealers, Inc. and its disciplinary officers, Austin Mun. Securities v. Nat. Ass'n of Securities, 757 F.2d 676, 689-92 (5th Cir.1985), and members of pardon and parole boards, Cruz v. Skelton, 502 F.2d 1101, 1101-02 (5th Cir.1974) (per curiam); Johnson ......
  • Request a trial to view additional results

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