National Ass'n of Securities Dealers, Inc. v. S.E.C., 04-1154.

• Decision Date: 13 December 2005
• Docket Number: No. 04-1154.,04-1154.
• Parties: The NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., Petitioner v. SECURITIES AND EXCHANGE COMMISSION, Respondent Anthony A. Elgindy, Intervenor.
• Court: U.S. Court of Appeals — District of Columbia Circuit

431 F.3d 803

The NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., Petitioner v. SECURITIES AND EXCHANGE COMMISSION, Respondent

Anthony A. Elgindy, Intervenor.

No. 04-1154.

United States Court of Appeals, District of Columbia Circuit.

Argued September 9, 2005.

Decided December 13, 2005.

On Petition for Review of an Order of the Securities and Exchange Commission.

Alan B. Lawhead argued the cause and filed the briefs for petitioner.

Anthony A. Elgindy, appearing pro se, was on the brief for intervenor.

Eric Summergrad, Deputy Solicitor, Securities and Exchange Commission, argued the cause for respondent. With him on the briefs were Giovanni P. Prezioso, General Counsel, Jacob H. Stillman, Solicitor, and Christopher Paik, Special Counsel.

Before: TATEL and BROWN, Circuit Judges, and EDWARDS, Senior Circuit Judge.^*

Opinion for the Court filed by Senior Circuit Judge EDWARDS.

HARRY T. EDWARDS, Senior Circuit Judge.

The National Association of Securities Dealers, Inc. ("NASD") is the only officially registered "national securities association" under § 15A of the Securities Exchange Act of 1934 ("Exchange Act" or the "Act"), 15 U.S.C. § 78o-3 (2000). Domestic Sec., Inc. v. SEC, 333 F.3d 239, 242 (D.C.Cir.2003). By virtue of its statutory authority, NASD wears two institutional hats: it serves as a professional association, promoting the interests of it members, see NASD,NASD Corporate Description, http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&nodeId=1010 (last visited Nov. 28, 2005); and it serves as a quasi-governmental agency, with express statutory authority to adjudicate actions against members who are accused of illegal securities practices and to sanction members found to have violated the Exchange Act or Securities and Exchange Commission ("SEC" or the "Commission") regulations issued pursuant thereto. 15 U.S.C. § 78o-3(b)(7). See Merrill Lynch v. Nat'l Ass'n of Sec. Dealers, Inc., 616 F.2d 1363, 1367 (5th Cir.1980) ("As a registered securities association, [NASD] has been `delegated governmental power ... to enforce ... the legal requirements laid down in the Exchange Act.'") (citation omitted).

Disciplinary actions brought by NASD's Department of Enforcement against members for violations of federal securities laws may be adjudicated before a NASD Hearing Panel. See Rules 9212 & 9221 of NASD's Code of Procedure (2005), NASD Manual 9212, 9221 (LEXIS). Hearing Panel decisions may be appealed to the National Adjudicatory Council ("NAC"), or they may be reviewed by NAC on its own initiative. See Rules 9311 & 9312 of NASD's Code of Procedure, NASD Manual 9311, 9312 (LEXIS). NASD must notify the SEC of any final disciplinary action it takes against a member. 15 U.S.C. § 78s(d)(1). The Commission may then act sua sponte, or pursuant to a petition from the aggrieved member, to review NAC's decision de novo. 15 U.S.C. § 78s(d)-(e).

A statutory system authorizing self-regulatory organizations to act as quasi-governmental agencies in disciplining members for federal securities law violations has existed for almost 70 years. In every statutory iteration of this authority, Congress has specified that adjudicatory actions of self-regulatory organizations like NASD are subject to plenary review by the SEC. Compare 15 U.S.C. § 78s(d)-(e) (2000) (current provisions governing SEC review of NASD disciplinary actions), with 15 U.S.C. § 78o-3(g)-(h) (1940) (original provisions governing SEC review of NASD disciplinary actions). Congress has provided for judicial review of SEC actions under § 25(a) of the Act, which enables "[a] person aggrieved by a final order of the Commission" to obtain judicial review. 15 U.S.C. § 78y(a) (2000).

In this case, the Commission reversed a determination by NAC disciplining a NASD member and its owner for, among other things, engaging in a manipulative scheme in violation of § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b). NASD now petitions for review under § 25(a) of the Act. The Commission argues that the petition for review should be dismissed, because Congress did not intend for § 25(a) to cover NASD when it is acting in its adjudicatory capacity. In other words, according to the Commission, NASD is not a "person aggrieved" when the Commission reverses a NASD disciplinary decision. We agree.

During the nearly 70 years that self-regulatory organizations have been recognized under the Exchange Act, Congress has never granted NASD a statutory right to seek judicial review of a SEC decision reversing disciplinary action taken by NASD as a first-level adjudicator under the statute. And no court has ever suggested that such review is possible. Indeed, we can find no case in which NASD, in its capacity as a first-level adjudicator in disciplinary actions, has ever petitioned for judicial review to challenge a SEC judgment overturning the initial decision rendered by NASD in its adjudicative capacity. We find no reason to allow it to do so now. We hold that the adjudicatory arm of NASD is not "[a] person aggrieved" within the meaning of § 25(a) of the Exchange Act when the Commission reverses a decision it has made. We therefore dismiss NASD's petition for review for want of jurisdiction.

I. BACKGROUND

A. NASD as a First-Level Adjudicator Under The Exchange Act

Two provisions of the Exchange Act define NASD's quasi-governmental authority to adjudicate actions against members who are accused of unethical or illegal securities practices and the Commission's oversight of that authority. These are §§ 15A and 19. Section 15A, 15 U.S.C. § 78o-3, lays out the specific duties of a registered national securities association. It sets out disciplinary functions which NASD, as a registered national securities association, must perform. The organization must first establish

rules ... designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating ... securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest.

15 U.S.C. § 78o-3(b)(6). Where NASD members have allegedly violated either association rules or federal securities law, NASD has the authority to consider disciplinary action in the first instance. See 15 U.S.C. § 78o-3(b)(7). If NASD proceeds against a member, it must provide a minimum level of process, including notice of the specific charges and an opportunity to be heard, as well as a statement of subsequent findings. See 15 U.S.C. § 78o-3(h). Fair disciplinary procedures are a prerequisite for registration of a national securities association. 15 U.S.C. § 78o-3(b)(8).

Given the statutory requirements of § 15A, NASD has established an elaborate adjudicative arm to address disciplinary actions. A Code of Procedure, see NASD Manual, Rule 9000 et seq. (2005), sets out the procedures for disciplinary actions brought by NASD's Department of Enforcement. Where a complaint has been filed against members for violations of federal securities laws, the adjudication may take place before a NASD Hearing Panel. See Rules 9212 & 9221 of NASD's Code of Procedure, NASD Manual 9212, 9221 (LEXIS). As noted above, Hearing Panel decisions may be appealed to NAC, or they may be reviewed by NAC on its own initiative. See Rules 9311 & 9312 of NASD's Code of Procedure, NASD Manual 9311, 9312 (LEXIS). Rule 9370, reflecting the Exchange Act's mandate, provides that "[a] Respondent aggrieved by final disciplinary action pursuant to the Rule 9200 Series or the Rule 9300 Series may apply for review by the Commission pursuant to Section 19(d)(2) of the Act." NASD Manual 9370 (LEXIS). See also Merrill Lynch, 616 F.2d at 1367 (describing NASD's adjudicative procedures).

Section 19, 15 U.S.C. § 78s, sets out the Commission's supervisory duties over all "self-regulatory organizations." NASD is a "self-regulatory organization" by virtue of the fact that it is a "registered securities association" under § 15A. See 15 U.S.C. § 78c(a)(26) (definition of "self-regulatory organization"). With respect to adjudications, the Commission's oversight begins with the obligation of self-regulatory organizations to notify the Commission of any final disciplinary sanction imposed on a member or associated person. 15 U.S.C. § 78s(d)(1). The statute also provides the Commission with plenary review powers. 15 U.S.C. § 78s(e). Once notified, the Commission may, on its own motion or on the application of any person aggrieved by the association's action, review NASD's disciplinary action. 15 U.S.C. § 78s(d)(2); see also Commission Rules of Practice 420 & 421, 17 C.F.R. §§ 201.420, 201.421 (2005). Section 19(e) authorizes the Commission to make an independent determination as to whether the violations found by the association occurred, and to change NASD's sanctions in whatever ways it deems appropriate. See 15 U.S.C. § 78s(e). The Commission may base its determination on the record compiled by the association, but it is not limited to that record and may adduce additional evidence. Commission Rule of Practice 452, 17 C.F.R. § 201.452. SEC's oversight of NASD's quasi-governmental disciplinary functions is not limited to review of individual disciplinary actions. Under § 19(g)(2), the Commission is empowered to relieve NASD of any of its enforcement responsibilities under the Exchange Act. 15 U.S.C. § 78s(g)(2).

The statutory scheme governing NASD actions parallels the Commission's internal adjudicative structures. The Commission is permitted to delegate its disciplinary functions to an Administrative Law Judge ("ALJ"). 15 U.S.C. § 78d-1(a). As with NASD, when an ALJ exercises the Commission's disciplinary powers, "the Commission shall retain a discretionary right to review the action of ... [the] administrative law judge... upon its own initiative or upon petition of a party to...