From Sense to Nonsense and Back Again: SRO Immunity, Doctrinal Bait-and-Switch, and a Call for Coherence

In autumn of 2008, US financial markets experienced a “meltdown” of a magnitude not known in generations. The ensuing economic crisis has prompted comparisons to the Great Depression, and brought along with it a renewed public focus In the decades since, courts have struggled to reconcile the SROs’ twin status as private entities, often operating for-profit, and as first on the regulatory regime that was born in the wake of the social, economic, and political carnage of that calamity. 

Amidst the widespread devastation of the 1930s, Congress sought to dramatically alter the state of securities markets in the United States. The Securities Exchange Act of 1934 and subsequent amendments, in particular, were instrumental in achieving this goal. The Act created an elaborate system of regulation that included both the federal government and private entities known as self-regulatory organizations (SROs). It is substantially this very system, established some seventy years ago, that continues to govern the securities marketplace to this day. 

In the decades since, courts have struggled to reconcile the SROs’ twin status as private entities, often operating for-profit, and as first-line regulators, charged with overseeing and disciplining their members in the stead of the government. One point that has proved particularly vexatious is the question of how to insulate SROs from civil liability stemming from their role as regulators. Common sense dictates that SROs ought to enjoy at least some immunity for undertaking activities normally performed by the government to preserve their incentives to act; but under what legal theory, and for which actions?