Immunities in Securities Investigations and Proceedings


Governmental and Regulatory Agency Immunities under Arizona Law in Securities Investigations and Proceedings

Please note that, while this article accurately describes applicable law on the subject covered at the time of its writing, the law continues to develop with the passage of time. Accordingly, before relying upon this article, care should be taken to verify that the law described herein has not changed.
Sometimes, persons who are named in administrative proceedings brought by governmental or regulatory agencies concerning securities offerings, disagree with having been named in such actions and ask the question: “Can I sue the regulatory agency?” Generally, the answer is "no" or "very unlikely."

As discussed below, if Arizona Corporation Commission (the “ACC”) and its Securities Division is acting within the scope of its judicial or legislative capacity, the ACC is likely entitled to absolute immunity under A.R.S. § 12-820.01(A)(1). Where, however, the ACC is acting in an administrative function that is quasi-judicial or quasi-executive, its subject actions must be examined on a factual, ad hoc basis to determine whether the ACC is entitled to immunity under A.R.S. § 12-820.01(A)(2). If the ACC’s subject actions involve the determination of fundamental governmental policy (i.e., policymaking decision), such as regulating and licensing a profession and occupation like securities dealers or salesmen, the ACC is likely entitled to absolute immunity.  

If the ACC’s subject actions do not involve a policymaking determination, but instead an operational decision, like whether to renew, revoke or suspend the license of a specific security dealer or salesman, the ACC is not necessarily entitled to absolute immunity, but may be entitled to qualified immunity under A.R.S. § 12-820.02(A) and would not be liable except for intentional injurious actions or those constituting gross negligence.

 I. Arizona Abolished Common Law Sovereign Immunity.

In 1963, the Arizona Supreme Court abolished common law sovereign immunity in Arizona:
“The substantive defense of governmental immunity is now abolished not only for the instant case, but for all other pending cases, those not yet filed which are not barred by the statute of limitations and all future causes of action. All previous decisions to the contrary are specifically overruled.” Stone v. Ariz. Highway Comm’n, 93 Ariz. 384, 392, 381 P.2d 107, 112 (1963). The court then noted that “[t]here is perhaps no doctrine more firmly established than the principle that liability follows tortious wrongdoing; that where negligence is the proximate cause of injury, the rule is liability and immunity is the exception.” Id. at 392, 381 P.2d at 112.
Almost 20 years later, given “inconsistencies in [the court’s] previous opinions,” the Arizona Supreme Court returned to and reinforced the spirit of Stone by removing the public/private duty doctrine as follows:
We shall no longer engage in the speculative exercise of determining whether the tort-feasor has a general duty to the injured party, which spells no recovery, or if he had a specific individual duty which means recovery. Thus, the parameters of duty owed by the state will ordinarily be coextensive with those owed by others.
Ryan v. State, 134 Ariz. 308, 310, 656 P.2d 597, 599 (1982). 

In electing to treat the state like a private litigant, the Arizona Supreme Court pointed out that certain areas of immunity would remain, such as legislative immunity, judicial immunity, and high-level executive immunity. Id. at 310-11, 656 P.2d at 599-600. 

However, given difficulties in the quasi-executive and quasi-judicial context, instead of adopting and applying a “discretionary acts” exception like its federal counterpart (the Federal Tort Claims Act), the court adopted an “ad hoc approach":
It is when we come to the executive functions that we have a mix which makes definition difficult. With boards, commissions, committees, and hearing officers performing a variety of functions, part of which are quasi-judicial, and with officers and employees making plans and decisions which set the course of government we do not feel it appropriate to attempt to define the limited parameters of immunity in the abstract; we propose to define those limitations on the basis of concrete, factual situations as they come before us.
Id. at 310-11, 656 P.2d at 599-600. 

As a general guide, in employing the spirit of Stone, the Arizona Supreme Court “endorse[d] the use of governmental immunity as a defense only when its application is necessary to avoid a severe hampering of a governmental function or thwarting of established public policy. Otherwise, the state and its agents will be subject to the same tort law as private citizens.” Id. at 311, 656 P.2d at 600. 

The Arizona Supreme Court also invited the legislature to intervene in developing this area of law. Id. at 310, 656 P.2d at 599. Pursuant to that invitation, as well as its constitutional power,[1] approximately one year later in 1984, the Arizona legislature enacted the Actions Against Public Entities or Public Employees Act (the “Act”), and thereby codified sovereign immunity in Arizona.[2] 

Consistent with the Arizona Supreme Court’s ruling in Stone, the express purpose and intent of the Act is as follows:
The legislature recognizes the inherently unfair and inequitable results which occur in the strict application of the traditional doctrine of sovereign immunity. On the other hand, the legislature recognizes that, while a private entrepreneur may readily be held liable for negligence within the chosenscope of his activity, the area within which government has the power to act for the public good is almost without limit and therefore government should not have the duty to do everything that might be done. Consequently, it is hereby declared to be the public policy of this state that public entities are liable for acts and omissions of employees in accordance with the statutes and common law of this state. All of the provisions of this act should be construed with a view to carry out the above legislative purpose.
Schabel v. Deer Valley Unified School Dist. No. 97, 186 Ariz. 161, 164, 920 P.2d 41, 44 (Ct. App. 1996) (quoting 1984 Ariz. Sess. Laws, Ch. 285, § 1).

The Act provides for absolute immunity and qualified immunity, which are discussed in turn in detail below, as well as the requirements for filing a claim against the state. Courts have analyzed and applied these immunity statutes, but “[s]ince immunity is the exception and not the rule . . . consistent with the intention of the legislature . . . judicial construction of immunity provisions in statutes applicable to government entities should be restrained and narrow.” Fidelity Sec. Life Ins. Co. v. State of Arizona, 191 Ariz. 222, 225, 954 P.2d 580, 583 (1998). See also Goss v. City of Globe, 180 Ariz. 229, 232, 883 P.2d 466, 469 (Ct. App. 1994) (immunity statute is viewed as “carving out a narrow exception” to the common law rule that the government is liable for tortious conduct).

 II. Absolute Immunity in Arizona.

A. In General.

Under the Act, a “public entity”[3] has absolute immunity and is not liable for acts and omissions of its “employees”[4] constituting either of the following: (1) the exercise of a judicial or legislative function; or (2) the exercise of an administrative function involving the determination of fundamental governmental policy. A.R.S. § 12-820.01(A).

The determination of a fundamental governmental policy under A.R.S. § 12-820.01(B) involves the exercise of discretion and includes, but is not limited to: 

(1) a determination of whether to seek or whether to provide the resources necessary for the purchase of equipment, the construction or maintenance[5] of facilities, the hiring of personnel, and the provision of governmental services;

(2) a determination of whether and how to spend existing resources, including those allocated for equipment, facilities and personnel;

(3) the licensing and regulation of any profession or occupation; and 

(4) the establishment, implementation and enforcement of minimum safety standards for light rail transit systems. 

A.R.S. § 12-820.01(B) 

Unlike its federal counterpart and other states,[6] the legislature did not intend for courts to make factual determinations as to whether these listed functions are discretionary; rather, as a matter of law, these policy roles under are discretionary and covered by absolute immunity. Bird, 170 Ariz. at 23. See also Fidelity Sec. Life Ins. Co., 191 Ariz. at 225, 954 P.2d at 583 (“To be absolutely immune . . . fundamental governmental policy is the element which, first and foremost, must be present in the decision making process. Once that element is found to exist, the exercise of discretion, under the statute, may be presumed. The term ‘discretion’ is used in the statute only to define an essential characteristic of determinations involving fundamental governmental policy.”).

B. Policymaking Decisions versus Operational Decisions.

Examples of those acts falling within A.R.S. § 12-820.01(B), and hence A.R.S. § 12-820.01(A)(2) and qualifying for absolute immunity, include: (1) the Arizona Structural Pest Control Commission’s licensing and regulation of structural pest control operators (see Bird, 170 Ariz. at 24, 821 P.2d at 27); (2) the Arizona Motor Vehicle Division’s adoption of appropriate rules and regulations to enforce the legislature’s mandate of removing drunk drivers from the road (see Evenstad, 178 Ariz. at 582, 875 P.2d at 815); (3) the Arizona Department of Education’s decision to require that teachers be certified, establishing certification requirements, developing an application and establishing procedures for processing applications and investigation applicants (see Doe v. State, 200 Ariz. 174, 177, 24 P.3d 1269, 1272 (2001)); (4) the City of Tempe’s decision to enter into an automatic aid agreement with other cities to coordinate emergency assistance responses and decisions that automatically flowed therefrom, such as which emergency unit would respond (see Myers v. City of Tempe, 212 Ariz. 128, 130-31, 128 P.3d 751, 753-54 (2006)); and (5) the City of Phoenix’s decision to use computer program to prioritize intersections for signalization and decisions that flowed directly therefrom, such as the decision not to install a traffic signal at a certain intersection (Kohl v. City of Phoenix, 215 Ariz. 291, 294-96, 160 P.3d 170, 173-75 (2007)).

Examples of those acts falling outside A.R.S. § 12-820.01(B) and thus not qualifying for immunity under A.R.S. § 12-820.01(A)(2) include: (1) the Tempe School District’s decision regarding placement of bus stop (see Warrington v. Tempe Elementary School Dist. No. 3, 187 Ariz. 249, 928 P.2d 673 (Ct. App. 1996)); (2) the Arizona Department of Insurance’s decision to approve a company’s transfer of domicile and renew its certificate of authority (see Fidelity Sec. Life Ins. Co., 191 Ariz. at 226, 954 P.2d at 584); and (3) the Arizona Department of Education’s application of criteria in processing and issuing a certificate to particular teacher (see Doe, 200 Ariz. at 177, 24 P.3d at 1272).

In comparing these two sets of cases, it is clear that Arizona courts have distinguished between prescribing rules or regulations or policymaking decisions, which are immune under A.R.S. § 12-820.01(A)(2), and the implementation of policy or operational decisions, which are not entitled to such absolute immunity. See Evenstad, 190 Ariz. at 583-84, 875 P.2d at 816-17 (noting courts frequently distinguish between development of rules and implementation of rules); see, e.g., Doe, 200 Ariz. at 177, 24 P.3d at 1272 (distinguishing policy level decision to not issue teaching certificates to persons convicted of certain listed offenses from operational level decision to process particular teaching application and issue a certificate to someone convicted of one of the listed offenses); Schabel, 186 Ariz. at 166, 920 P.2d at 46 (distinguishing policy level decision to construct playground at school and allocate funds for that purpose from operational level decision regarding what specific pieces of equipment to have on playground). See also Meredith K. Marder, Comment, "Kohl v. City of Phoenix: Clarifying the Scope of Absolute Municipal Immunity," 49 Ariz. L. Rev. 1017 (2007).

Prescribing rules or regulations is not a “routine, everyday function. Instead, it is an administrative function conducted at a policy-making level.” Evenstad, 190 Ariz.at 582, 875 P.2d at 815. in addition to those examples set forth in A.R.S. § 12-820.01(B), other examples of policymaking “include such matters as whether the government or its agencies should pursue one general course of action over another, whether an agency of government should construct a particular building or where the building should be located, or a decision as to the direction and focus of an entire regulatory scheme.” Fidelity Sec. Life Ins. Co., 191 Ariz. at 225, 954 P.2d at 583.

“Operational level acts concern routine, everyday matters. They do not require evaluation of broad policy factors.” Evenstad, 190 Ariz.at 582, 875 P.2d at 815. A common issue among operational level decisions is whether the state erred in implementing a decision.

C. Licensing and Regulation of Profession or Occupation.

The one designated discretionary function that may be applicable to the ACC is the “licensing and regulation of any profession or occupation.” A.R.S. § 12-820.01(B)(3). Notably, this policy function is not limited to the professions and occupations listed in Title 32 of the Arizona Revised Statutes. See Doe, 200 Ariz. at 178, 24 P.3d at 1273. Accordingly, A.R.S. § 12-820.01(B)(3) probably applies to the licensing and regulation of securities dealers and salesman as set forth in the Arizona Securities Act, A.R.S. § 44-1801, et seq., even though it is not in Title 32. Using the same reasoning the Arizona Court of Appeals applied in Bird, 170 Ariz. at 24, 821 P.2d at 287, it is fairly clear that in governing the registration of dealers and salesman in Article 9 of Chapter 12 of Title 44, as well as the denial, revocation and suspension thereof in Title 10, the State, through the ACC and its Securities Division, licenses a profession or occupation. 

Of note, however, is that A.R.S. § 12-820.01(B)(3) does not extend to include the licensing or regulation of work environments rather than work or workers. See, e.g., De La Cruz v. State of Arizona, 192 Ariz. 122, 125, 961 P.2d 1070, 1073 (Ct. App. 1998) (rejecting State’s contention that Arizona Division of Occupational Safety and Health’s inspection of workplace involves licensing and regulation of profession or occupation, especially since the contracting profession or occupation that it affects are regulated and licensed by the Arizona Registrar of Contractors); Diaz v. Magma Copper Co., 190 Ariz. 544, 553-55, 950 P.2d 1165, 1174-76 (Ct. App. 1997) (denying immunity to State Mine Inspector’s operation and inspection of mines, which does not regulate or license mining as an occupation, but rather regulates the environment in which miners work).

Absolute immunity under A.R.S. § 12-820.01(B)(3) also does not extend to include the certification of a business entity like an insurance company rather than a profession or occupation. See Fidelity Sec. Life Ins. Co., 191 Ariz. at 226, 954 P.2d at 584 (denying immunity to Arizona Department of Insurance who allegedly approved transfer of domicile knowing company was insolvent, failed to adequately supervise company and failed to deny company’s annual requests for renewal of its certificate of authority).

Finally, A.R.S. § 12-820.01(B)(3) does not extend to decisions affecting individual professionals, such as the decision to grant or revoke a license to particular members of a profession; it only extends to professions and occupations. See Doe, 200 Ariz. at 178, 24 P.3d at 1273 (denying immunity to Arizona Department of Education who processed and approved teaching certificate to teacher that allegedly molested child).

The ACC and its Securities Division likely fall within the definition of “state,” and hence “public entity,” and is therefore eligible for absolute immunity under A.R.S. § 12-820.01.

“By virtue of the Arizona Constitution,[7] the [ACC and its] Commissioners function in an Executive capacity, they adopt rules and regulations and thereby functioning in a Legislative capacity, and they also act in a Judicial capacity sitting as a tribunal and making decisions in contested matters.” See Ariz. Const. Art. XV (establishing the Arizona Corporation Commission and its powers).

Thus, if the ACC is acting within the scope of its foregoing judicial or legislative capacity, the ACC is likely entitled to absolute immunity under A.R.S. § 12-820.01(A)(1). 

Where, however, the ACC is acting in an administrative function that is quasi-judicial or quasi-executive capacity, its subject actions must be examined on a factual, ad hoc basis to determine whether the ACC is entitled to immunity under A.R.S. § 12-820.01(A)(2). If the ACC’s subject actions involve the determination of fundamental governmental policy (i.e., policymaking decision), such as the regulation and licensing of a profession and occupation like securities dealers or salesmen, the ACC is likely entitled to absolute immunity. If the ACC’s actions at issue do not involve such a policymaking determination, but instead an operational decision, like whether to revoke the license of a specific security dealer or salesman, the ACC is not necessarily entitled to absolute immunity but may be entitled to qualified immunity, which is discussed next.

 III. Qualified Immunity in Arizona.

A public entity or public employee[8] has qualified immunity and is not liable for the following acts and omissions, unless the “public employee acting within the scope of the public employee’s employment intended to cause injury[9] or was grossly negligent:” 

(1) the failure to make an arrest or the failure to retain an arrested person in custody; 

(2) an injury caused by an escaping or escaped prisoner[10] or a youth committed to the department of juvenile corrections;

(3) an injury resulting from the probation, community supervision or discharge of a prisoner or a youth committed to the department of juvenile corrections, from the terms and conditions of the prisoner’s or youth’s probation or community supervision or from the revocation of the prisoner’s or youth’s probation, community supervision or conditional release under the psychiatric security review board;

(4) an injury caused by a prisoner to any other prisoner or an injury caused by a youth committed to the department of juvenile corrections to any other committed youth;

(5) the issuance of or failure to revoke or suspend any permit, license, certificate, approval, order or similar authorization for which absolute immunity is not provided pursuant to section 12-820.01;[11]

(6) the failure to discovery violations of any provision of law when inspections are done of property other than property owned by the public entity in question;

(7) an injury to the driver of a motor vehicle that is attributable to the violation by the driver of section 28-693, 28-1381 or 28-1382;

(8) the failure to prevent the sale or transfer of a handgun to a person whose receipt or possession of the handgun is unlawful under any federal law or any law of this state;

(9) prevent the sale or transfer of a handgun to a person who may lawfully receive or possess a gun; and

(10) the failure to detain a juvenile taken into temporary custody or arrested for a criminal offense or delinquent or incorrigible act in the appropriate detention facility, jail or lockup described in section 8-308.

A.R.S. § 12-820.02(A). “The qualified immunity . . . applies to a public entity or public employee if the injury or damage was caused by a contractor’s employee or a contractor of a public entity acting within the scope of the contract,” but the qualified immunity “does not apply to the contractor or the contractor’s employee.” A.R.S. § 12-820.02(B).

In short, if the ACC is not entitled to absolute immunity under A.R.S. § 12-820.01(A), it may be entitled to qualified immunity under A.R.S. § 12-820.02(A)(5), depending upon the subject acts or omissions, such as the decision to issue, renew, revoke or suspend the license of a dealer or salesman. See Doe, 200 Ariz. at 177, 24 P.3d at 1272 (“processing of particular application in accordance with established procedures . . . enjoys only qualified immunity under A.R.S. section 12-820.02). However, the ACC is not entitled to qualified immunity if the subject acts were done with intent or constitute gross negligence. The claimant must prove the elements of intent to injure and gross negligence. Fidelity Sec. Life Ins. Co., 191 Ariz. at 227, 954 P.2d at 585.

 IV. Filing Suit Against the State.

If one chooses to file suit against the state notwithstanding the above, it is important to know the Act sets forth a one-year statute of limitations: “All actions against any public entity or public employee shall be brought within one year after the cause of action accrues and not afterward.” A.R.S. § 12-821. However, the common law discovery rule does apply in determining when a cause of action has accrued pursuant to A.R.S. § 12-821. See Dube v. Likins, 216 Ariz. 406, 422, 167 P.3d 93, 109 (Ct. App. 2007).

One must also file a notice of claim within 180 days after the cause of action accrues: “Persons who have claims against a public entity or a public employee shall file claims with the person or persons authorized to accept service for the public entity or public employee as set forth in the Arizona rules of civil procedure within one hundred eighty days after the cause of action accrues. A.R.S. § 12-821.01(A). 

The discovery rules also applies to this section: “a cause of action accrues when the damaged party realizes he or she has been damaged and knows or reasonably should know the cause, source, act, event, instrumentality or condition which caused or contributed to the damage.” Id. § 12-821.01(B).[12]

The notice of claim must contain: (1) facts sufficient to permit the public entity or public employee to understand the basis upon which liability is claimed; and (2) a specific amount for which the claim can be settled and the facts supporting that amount. Id. § 12-821.01(A). If a notice of claim is not filed within 180 days after the cause of action accrues, it is barred and no action may be maintained thereon. Id.

A notice of claim against a public entity or public employee is deemed denied 60 days after the filing of the claim unless the claimant is advised of the denial in writing before the expiration of 60 days. Id. § 12-821.01(E).

Finally, the Act precludes punitive damages against the state as follows: “Neither a public entity nor a public employee acting within the scope of his or her employment is liable for punitive or exemplary damages.” A.R.S. § 12-820.04.

In addition to the foregoing statutory procedural considerations of filing suit against the State, one should consider the merits of the substantive grounds of such a suit. For example, it is important to consider the broad statutory grant of authority the ACC has to publicly or privately investigate actual and potential securities violations in or outside of Arizona:
The commission . . . may make such public or private investigations within or outside of this state as the commission deems necessary to determine whether any person has violated or is about to violate any provisions of this chapter or any rule or order hereunder, or to aid in the enforcement of this chapter, or to aid in prescribing rules and forms hereunder, and may at any time either prior to or subsequent to the registration of any securities or any dealer or salesman, investigate and examine into the affairs of any person issuing or dealing in or selling or buying or intending to issue, deal in or sell or buy securities or into the affairs of any person when the commission believes that such person is or may be issuing or dealing in or selling or buying securities.
A.R.S. § 44-1822.

In other words, “an appropriately empowered agency ‘can investigate merely on suspicion that the law is being violated, or even just because it wants assurance that it is not.’” Carrington v. Ariz. Corp. Comm’n, 199 Ariz. 303, 305, 18 P.3d 97, 99 (Ct. App. 2000). Therefore, “courts give the Commission ‘wide berth’ when they review the validity of Commission investigations.” Id. at 305, 18 P.3d at 99. 

However, the ACC may not “act unreasonably” or “use its investigatory powers to ‘harass, intimidate, or defame’ a business.” Id. at 305, 18 P.3d at 99. See, e.g., Polaris Int’l Metals Corp. v. Ariz. Corp. Comm’n, 133 Ariz. 500, 506-08, 652 P.2d 1023, 1029-31 (1982) (reversing grant of summary judgment on request to declare ACC’s investigation unreasonable where the “length and intensity of the investigation, the allegedly false statements made about Polaris, and the refusal of the Commission to hear Polaris’ side of the case either formally or informally are all evidence from which it might be inferred that the Commission is acting arbitrarily and beyond its authority.”).
[1] See Ariz. Const. Art. IV, Part 2, Sec. 18(“The legislature shall direct by law in what manner and in what courts suits may be brought against the state.”); Clouse v. State of Arizona, 199 Ariz. 196, 16 P.3d 757 (2001) (holding legislature acted within power granted by Article IV, Part 2, Section 18 of Arizona Constitution when it adopted A.R.S. § 12-820.02(A)); Evenstad v. State of Arizona, 178 Ariz. 578, 582, 875 P.2d 811, 815 (Ct. App. 1993) (holding A.R.S. § 12-820.01 is constitutional and does not violate abrogation, equal protection or due process clauses).

[2] For a discussion of the legislative history of this Act, see City of Tucson v. Fahringer, 164 Ariz. 599, 600, 795 P.2d 819, 820 (1990); James L. Conlogue, Note, A Separation of Powers Analysis of the Absolute Immunity of Public Entities, 28 Ariz. L. Rev. 49, 50 (1986).

[3] “‘Public entity’ includes this state and any political subdivision of this state.” A.R.S. § 12-820(7). “‘State’ means this state and any state agency, board, commission or department.” Id. § 12-820(8).

[4] “‘Employee’ includes an officer, director, employee or servant, whether or not compensated or part time, who is authorized to perform any act or service, except that employee does not include an independent contractor. Employee includes noncompensated members of advisory boards appointed as provided by law and leased employees.” A.R.S. § 12-820(1). “‘Leased employee’ means a person providing services to a public entity under a lease agreement and is not an independent contractor or temporary employee.” Id. § 12-820(3).

[5] “‘Maintenance’ means the establishment or continuation in existence of facilities, highways, roads, streets, bridges or rights-of-way by a public entity and does not mean or refer to ordinary repair or upkeep.” A.R.S. § 12-820(4).

[6] See Bird v. State, 170 Ariz. 20, 23, 821 P.2d 287 (Ct. App. 1991) (“The Arizona statutory scheme contrasts with the Federal Tort Claims Act and governmental tort liability statutes of other states that provide immunity for actions arising from the government’s exercise of a ‘discretionary function or duty’ without further definition of ‘discretionary function or duty’ within the statute.”).

[7] See Ariz. Const. Art. XV.

[8] “‘Public employee’ means an employee of a public entity.” A.R.S. § 12-820(6).

[9] “‘Injury’ means death, injury to a person, damage to or loss of property or any other injury that a person may suffer that would be actionable if inflicted by a private person.” A.R.S. § 12-820(2).

[10] “‘Prisoner’ means a person incarcerated while awaiting sentence or while serving a sentence imposed by a court of law.” A.R.S. § 12-820(5).

[11] A.R.S. § 12-820.01(A)(5) would include licenses outside occupational or professional licenses, such as driver’s licenses, licenses to conduct bingo games and transaction privilege tax licenses. Bird, 170 Ariz. at 24.

[12] If one must first submit the claim to a binding or nonbinding dispute resolution process or an administrative claims or review process under any rule, regulation or contract, the cause of action accrues when all such procedures, processes or remedies have been exhausted, with the time to file a notice of claim running from the date on which a final decision or notice of disposition is issued. A.R.S. § 12-821.01(C). The parties may also contractually agree to extend the time for filing a notice of claim. Id.


If you have questions regarding a possible securities law matter, or to arrange for a consultation concerning your legal matter, please contact Robert Mitchell at rdm@tblaw.com or at (602) 452-2730.
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