Sometimes parties involved in arbitration, regulatory, or other legal proceedings inquire whether they might be able to assert claims against the Financial Industry Regulatory Authority (FINRA). Without exploring the merits of such claims, the technical answer to the question is "no."
Can an individual bring a private claim against FINRA, for example, for a claim regarding abuse of process or failure to provide proper notice?
FINRA is the primary regulatory body for the broker-dealer industry. It is a self-regulatory organization (“SRO”) authorized under the Securities and Exchange Act. See Sacks v. Securities and Exchange Commission, 648 F.3d 945, 948 (9th Cir. 2011).
Courts have repeatedly held that an “SRO and its officers are entitled to absolute immunity from private damages suits in connection with the discharge of their regulatory responsibilities.” Standard Investment Chartered, Inc. v. Nat’l Ass’n of Sec. Dealers, Inc., 637 F.3d 112, 115 (2nd Cir. 2011). This “immunity protects private actors when they perform important governmental functions.” Sparta Surgical Corp. v. Nat’l Ass’n of Sec. Dealers,
159 F.3d 1209, (9th Cir. 1998) quoting Barbara v. New York Stock Exchange,
99 F.3d 49, 58 (2nd Cir. 1996). Accordingly, SROs are considered quasi-governmental authorities. DL Capital Group, LLC v. NASDAQ Stock Market, Inc., 409 F.3d 93, 95 (2nd Cir. 2005). SRO immunity includes both affirmative acts and omissions and failures to act. Standard, 637 F.3d at 115. While litigants have argued for an exception to the absolute immunity in cases of fraud, Courts have refused to carve out such exceptions. DL Capital Group, LLC, 409 F.3d at 95 (also refusing to distinguish between suits brought by public investors versus suits brought by SRO members).
While the immunity is broad, “self-regulatory organizations do not enjoy complete immunity from suits.” Id. at 1213. To the extent a claim arises as a result of private business or commercial conduct of FINRA, it remains subject to liability. Weissman v. Nat’l Ass’n of Sec. Dealers, 468 F.3d 1306, 1312 (11th Cir. 2006); see also Sparta Surgical Corp. v. Nat’l Ass’n of Sec. Dealers, 159 F.3d 1209, 1213 (9th Cir. 1998). For example, SRO’s, such as NASDAQ, have been subject to private suit for private business acts, such as, advertising which is non-governmental and entirely unrelated to its delegated authority. See Id.
“SRO immunity provides protection not only from liability, but also from the burdens of litigation, including discovery, and should be ‘resolved at the earliest possible stage in the litigation.’” In re Facebook, Inc., MDL No. 12-2389, 2013 U.S. Dist. LEXIS 177051 (S.D.N.Y. December 11, 2013). Courts apply “a functional test to determine whether an SRO is entitled to immunity based upon the facts” of the case. Standard, 637 F.3d at 116.
Courts have held that FINRA is “immune from civil damage suits for conduct performed as a part of their statutorily delegated adjudicatory, regulatory, and prosecutorial authority.” Weissman v. Nat’l Ass’n of Sec. Dealers, 468 F.3d at 1311; Sparta Surgical Corp. v. Nat’l Ass’n of Sec. Dealers, 159 F.3d at 1214. As such, claims related to abuse of process, providing proper notice, and service of process are all likely associated with FINRA’s arbitral and prosecutorial authority and FINRA would be entitled to immunity.
Can an individual bring a private action against a FINRA arbitrator if they are dissatisfied with the results of a FINRA arbitration?
Arbitrators are immune from civil suit when they are acting within their capacity as arbitrators. Gill v. Fin. Ind. Regulatory Auth., 2013 U.S. Dist. LEXIS 44088 (March 6, 2013). This immunity is similar to judicial and quasi-judicial immunity. Because “the nature and function performed by arbitrators necessitates protection analogous to that traditionally accorded to judges.” Gill v. Fin. Ind. Regulatory Auth., 2013 U.S. Dist. LEXIS 44088 (March 6, 2013) quoting Prudential Bache-Sec. Ltd. v. Nat’l Ass’n of Sec. Dealers Dispute Resolution, Inc., 289 F. Supp. 2d 438, 440 (S.D.N.Y. 2003).
The purpose of arbitral immunity is to protect the “decision-maker from undue influence and [to] protect the decision-making process from reprisals by dissatisfied litigants.” Id. quoting Jimenez v. Nat’l Ass’n of Sec. Dealers Dispute Resolution, Inc., No. 07 Civ. 3360, 2008 U.S. Dist. LEXIS 40324 (N.D. Cal. May 5, 2008); Sacks v. Dietrich, 663 F.3d 1065, 1069 (9th Cir. 2011). Accordingly, as long as the arbitrator was acting within his or her scope of arbitrator’s duties, he or she is entitled to arbitral immunity. See Sacks, 663 F.3d at 1069.
In summary, FINRA and FINRA Arbitrators are entitled to immunity from private civil actions when they are acting within their delegated authority.