Broker-Dealer Litigation - Greenberg Traurig LLP

ing such court actions (the “1990 Rule Change”), FINRA filed the proposed rule change under
Section 19(b)(3)(A)(i) of the Exchange Act. That section allows self-regulatory organizations to
avoid the requirement to engage in a public notice and comment period prior to approval of rule
changes, but only for so-called “house-keeping” rules and other rules that do not substantially
effect the public interest or the protection of investors. The court held the 1990 Rule Change
was a new substantive rule that affected the rights of disciplined members regarding the payment
of fines from disciplinary proceedings. Thus, the 1990 Rule Change should have been approved
only after the prescribed notice and comment period, not as a “house-keeping” rule. Since the
1990 Rule Change was never properly promulgated, FINRA lacked authority to judicially
enforce collection of disciplinary fines.
Standard Inv. Chartered, Inc. v. National Assoc. of Sec. Dealers, Inc., 637 F.3d 112 (2d. Cir.
2011).
Suit was brought by a member of the NASD which alleged that NASD and its officers
made misstatements in connection with a proxy solicitation through which the NASD sought to
amend its bylaws as part of its consolidation with NYSE Group, Inc. The Court of Appeals held
a self-regulatory organization and its officers have absolute immunity from private damages suits
in connection with amendment of the organization’s bylaws where, as here, the amendments are
“inextricable” from the organization’s role as a regulator. As part of its reasoning, the court
found the SEC’s role in approving or adopting amendments to NASD’s bylaws to be significant.
The court found that this framework highlights the extent to which a self-regulatory
organization’s bylaws are closely linked with the regulatory powers the SEC delegates to such
organizations and confirm that immunity should apply.
C.7
8. Margin Violations
C.8
In re Application of Philip L. Spartis and Amy J. Elias, FINRA Admin. Proc. File No. 3-13979,
2011 SEC LEXIS 1693 (May 13, 2011).
The Securities and Exchange Commission (the “SEC”) affirmed the disciplinary action
taken by NYSE Regulation (now the Financial Industry Regulatory Authority, “FINRA”)
(“NYSE”) against Philip L. Spartis and Amy J. Elias, former registered representatives of
Salomon Smith Barney, Inc. (the “Firm”), a member of the New York Stock Exchange, LLC.
The NYSE found that Spartis and Elias caused the Firm to violate NYSE Rule 472.30 by sending
customers communications that omitted material facts and/or were misleading with regards to the
risks of using margin loans. Specifically, the representatives provided marketing materials to
their customers, between 1998 and 2001, with connection with the customers’ exercise of
employee stock options that had been granted to them by WorldCom, Inc. The material
encouraged customers to utilize an exercise-and-hold strategy whereby employees could
purchase stock at the grant price and hold onto it for a period of time, paying the purchase price
of the stock, taxes, and fees with cash or by use of a margin loan obtained through the Firm. The
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