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SRO, SEC Orders on Section 11(a) Violations Upheld

The 2nd U.S. Circuit Court of Appeals upheld two orders issued by the SEC in connection with brokers trading for accounts on the New York Stock Exchange in which the brokers were interested or over which they exercised discretion. The alleged misconduct was violative of Exchange Act Section 11(a) and Rule 11a-1.

These prohibitions were intended to prevent floor brokers from exploiting short-term market information and opportunities available to them but unavailable to other investors. In one case, MFS Securities Corp. v. SEC, a brokerage firm was terminated from NYSE membership. The firm objected to the SEC's order affirming the dismissal because of alleged conflicts of interest involving individual commissioners that, according to the firm, compromised the impartiality of the entire Commission.

Former SEC Chairman Harvey Pitt had represented the NYSE in an SEC investigation relating to the practices at issue before coming to the SEC, and current chairman William Donaldson had been chairman of the exchange during the period in question. Both chairmen recused themselves from the SEC's review of the matter. The firm claimed that this was insufficient, as the agency was " hopelessly compromised" by the conflicts involving the incoming and outgoing chairmen.

The appellate panel rejected this contention, stating that the " personal recusals were sufficient to cure any impropriety or appearance of impropriety with respect to the Commission proceedings." According to the court, "there is no basis upon which we can conclude that the Commission, as an institution, was somehow thereby disqualified from considering and ruling on the controversy. " The court also found that the firm failed to exhaust administrative relief before seeking court review.

The second case, D'Alessio v. SEC, also involved court review of an SEC order concerning termination of NYSE membership. After termination, the broker sued the NYSE on various state law grounds. The suit was eventually dismissed because the NYSE enjoyed regulatory immunity. As a result of the lawsuit, however, the broker claimed that the entire NYSE was biased against the broker and could not conduct a fair hearing.

The appellate panel stated that "acceptance of the petitioners' theory would give rise to a perverse incentive for exchange members, when fearing possible exchange disciplinary proceedings and desiring to disqualify exchange members in any such adjudication, to strike preemptively in the courtroom against the exchange." In rejecting the challenge, the court concluded that "we can discern no legitimate goal to be served by encouraging such litigation. " A claim that the penalties imposed were unduly severe was also rejected.

¨ D'Alessio v. SEC (2ndCir) is reported at ¶92,884 and MFS Securities Corp. v. SEC (2ndCir) is reported at ¶92,885 .