United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued September 15, 2008 Decided November 7, 2008
No. 07-7162
IN RE: SERIES 7 BROKER QUALIFICATION EXAM SCORING
LITIGATION,
WILLIAM LOWE, ET AL.,
APPELLANTS
v.
THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
AND EDS CORPORATION,
APPELLEES
Appeal from the United States District Court
for the District of Columbia
(No. 06mc00355)
Gerald E. Martin argued the cause for appellants. With him
on the briefs was Herbert E. Milstein. Jonathan W. Cuneo and
Steven A. Skalet entered appearances.
Douglas R. Cox argued the cause for appellees The National
Association of Securities Dealers, Inc., et al. With him on the
brief was F. Joseph Warin.
Michael A. Carvin argued the cause for appellee EDS
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Corporation. With him on the brief were James E. Gauch and
Juliet J. Karastelev.
Before: BROWN, Circuit Judge, and EDWARDS and
SILBERMAN, Senior Circuit Judges.
Opinion for the Court filed by Circuit Judge BROWN.
BROWN, Circuit Judge: The question before us is whether
common law causes of action can be alleged against a Self-
Regulatory Organization (“SRO”) for the negligent performance
of its duties under the Securities Exchange Act of 1934
(“Exchange Act”). 15 U.S.C. § 78o-3(b). Despite a seemingly
impenetrable wall of contrary precedent, plaintiffs argue that
while suits challenging an SRO’s discretionary decisions are
clearly prohibited, SROs may be sued for the negligent
performance of ministerial functions. The district court did not
buy it. Neither do we. We affirm the district court’s grant of the
defendants’ motion to dismiss.
I. Background
The National Association of Securities Dealers (“NASD”)
(now known as the Financial Industry Regulatory Authority,
Inc.), an SRO, administers the Series 7 examination, a
computerized multiple-choice test, as part of the comprehensive
regulation of the securities industry. Electronic Data Systems
(“EDS”) is a private corporation, hired by NASD for technical
services related to administration of the Series 7 exam.
For each exam, NASD randomly draws 250 questions of
varying difficulty from a larger pool; each applicant receives
only a 250-question subset of the larger pool on her particular
examination. After an applicant takes the Series 7 exam, a
software program developed by EDS scores the exam, adjusting
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for level of difficulty, and reports the results immediately to the
applicant.
Sometime before October 1, 2004, an EDS maintenance
technician inadvertently switched two of the three difficulty
variables for approximately 213 questions. On October 1, 2004,
those 213 questions were added into NASD’s pool of questions.
From that point forward, tests for many applicants included at
least some of the 213 affected questions. Although the answer
choices for the affected questions were not disturbed, the
mistaken alteration of the difficulty ratings caused some test
scores to be misreported. Between October 1, 2004 and
December 20, 2005, when NASD discovered the mistake,
60,500 applicants had taken the test.
On January 6, 2006, NASD issued a press release, publicly
acknowledging the results for 1,882 applicants had been mis-
reported as failing scores. All affected applicants had their
results corrected and their applications approved.
Some of the applicants who received incorrect Series 7
scores filed suit and these actions became part of a nationwide
consolidated class complaint asserting causes of action for
common law breach of contract, negligence, and negligent
misrepresentation. The district court dismissed the complaint,
noting plaintiffs are “seeking remedies for negligent
performance of an SRO’s regulatory duties that Congress did
not see fit to provide.” In re Series 7 Broker Qualification Exam
Scoring Litig., 510 F. Supp. 2d 35, 49, 50 (D.D.C. 2007).
II. Discussion
Under the Exchange Act, any person conducting securities-
related business must be associated with a registered securities
association such as NASD. 15 U.S.C. §§ 78o(a)(1), (b)(8). The
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Act requires all such persons to meet “standards of training,
experience, competence, and such other qualification as the
[SEC] finds necessary or appropriate in the public interest or for
the protection of investors.” Id. § 78o(b)(7). The SEC has, in
turn, delegated to NASD the responsibility of devising a broker
qualification exam to measure the competency of applicants.
See 17 C.F.R. § 240.15b7-1. The delegation involves close
oversight; the SEC approves all rule changes by an SRO such as
NASD, no matter how minor. 15 U.S.C. § 78s(b). If the SEC
deems it necessary, it may also amend an SRO’s rules itself. Id.
§ 78s(c). The Exchange Act requires SROs to comply with the
Act, the SEC’s rules, and their own rules. Id. § 78s(g). Failure
to do so can result in severe sanctions, such as revocation of
SRO registration. Id. § 78s(h).
NASD has the right to bar membership to any applicant
who does not meet the standards of competence prescribed by
NASD’s rules, including a passing score on the Series 7 exam.
Id. § 78o-3(g)(3)(B). Any individual barred from membership
by the NASD has statutorily guaranteed rights to appeal. See id.
§§ 78s(d), (f), 78y(a)(1). Congress has created a complex
system of review, involving several stages of appeal, for
precisely the type of harm plaintiffs allege here. Id. §§ 78s(d),
78y(a)(1) (allowing review of improper denials of membership).
Appeals can be brought before the SEC and, if desired, in the
federal courts of appeals. Id. §§ 78s(d), 78y(a)(1).
Additionally, NASD rules (promulgated under the authority
delegated to it by the SEC, as envisioned by the Exchange Act)
provide for two internal layers of appeal. See NASD Manual,
Rules 9524, 9525, available at http://finra.complinet.com/finra
(last visited Oct. 21, 2008). In total, applicants who believe
their registration has been improperly denied have four potential
levels of appeal: two with NASD, one before the SEC, and one
in the federal courts of appeals.
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Plaintiffs, who have had the benefit of every available
administrative remedy, concede there is no federal implied
private right of action; nevertheless, they insist their state law
claims based on negligence and breach of contract are
permissible. Defendants argue that such causes of action are
impliedly preempted by federal law and, alternatively, that they
are immune from suit based on regulatory immunity. Whether
analyzed under preemption doctrine or a theory of regulatory
immunity, the result is the same: plaintiffs cannot raise a
common law complaint against defendants based on duties
arising under the Exchange Act.
It is well established that “the question whether a certain
state action is pre-empted by federal law is one of congressional
intent.” Allis-Chalmers Corp. v. Lueck, 471 U.S. 202, 208
(1985). When deciding the availability of such claims, “[t]he
purpose of Congress is the ultimate touchstone.” Retail Clerks
Int’l Ass’n v. Schermerhorn, 375 U.S. 96, 103 (1963). To assess
the availability of a state common law cause of action, we
therefore direct our attention to the intent of Congress. As the
Supreme Court has stated, “[s]tate action may be foreclosed by
express language in a congressional enactment, by implication
from the depth and breadth of a congressional scheme that
occupies the legislative field, or by implication because of a
conflict with a congressional enactment.” Lorillard Tobacco
Co. v. Reilly, 533 U.S. 525, 541 (2001).
Several other circuits have analyzed whether common law
claims can be raised based on an SRO’s duties under the
Exchange Act. Although the cases do not explicitly rely on
preemption, the reasoning of our sister circuits is instructive
regarding the preemptive intent of the congressional scheme. In
Barbara v. N.Y. Stock Exch., Inc., 99 F.3d 49 (2d Cir. 1996), the
Second Circuit held the New York Stock Exchange was immune
from claims arising out of disciplinary proceedings required
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under the Exchange Act. Id. at 59. “[A]llowing suits against the
Exchange arising out of the Exchange’s disciplinary functions
would clearly stand as an obstacle to the accomplishment and
execution of the full purposes and objectives of Congress,
namely, to encourage forceful self-regulation of the securities
industry.” Id.
Later, in Desiderio v. NASD, 191 F.3d 198 (2d Cir. 1999),
an applicant rejected for refusing to sign an arbitration clause
had her common law tort claim dismissed because “there is no
private right of action available under the Securities Exchange
Act to redress denials of membership.” Id. at 208. In Desiderio,
like in Barbara, the Second Circuit found common law causes
of action inconsistent with Congress’s intent under the Exchange
Act.
Similarly, the Ninth Circuit found a common law breach of
contract claim could not be raised against NASD because doing
so “would allow states to define by common law the regulatory
duties of a self-regulatory organization.” Sparta Surgical Corp.
v. NASD, 159 F.3d 1209, 1215 (9th Cir. 1998). The court in
Sparta felt such a result “cannot co-exist with the Congressional
scheme of delegated regulatory authority under the Exchange
Act.” Id. See also MM&S Fin., Inc. v. NASD, 364 F.3d 908,
912 (8th Cir. 2004) (“[A]llowing MM&S to assert a private
breach of contract claim [against NASD] would vitiate
Congress’s intent not to allow private rights of action against
self-regulatory organizations for violating NASD’s own rules.”).
Though not always explicitly identifying the underlying
premise, courts have consistently found Congress’s intent under
the Exchange Act precludes common law causes of action, and
we agree with the reasoning of our sister circuits.
The common law claims in this case—whether presented in
tort or contract—seek monetary damages based on NASD’s
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wrongful determination of competency standards for specific
applicants. Plaintiffs attempt to distinguish their case from the
long line of precedent by arguing the previous cases involved
violations of the Exchange Act which were artificially described
as common law claims—that is, common law claims in name
only, but in substance actions under the Exchange Act.
Although plaintiffs insist their claims are “genuine” common
law claims, this contention is beside the point, because it is those
claims which Congress intended to preempt in the Exchange
Act, and which would “stand as an obstacle to the
accomplishment and execution of the full purposes and
objectives of Congress.” Barbara, 99 F.3d at 59.
As the Supreme Court has noted in another context, the
structure of a statute may imply that Congress intended to
preclude challenges arising under a statute when those
challenges are outside the system of review prescribed by the
statute. See Block v. Cmty. Nutrition Inst., 467 U.S. 340, 349
(1984). We are confident that any actions against SEC
regulators, or those acting in their stead, are limited to the four
levels of review specified by the Exchange Act. The multiple
layers of review evince Congress’s intent to direct challenges
based on denials of membership to the avenues Congress
created. Had Congress been silent on this issue, a more
plausible case for common law suits might be made. But its
clear designation of an appellate process shows a contrary
intent: rather than allowing plaintiffs to sue under common law
theories, Congress created a self-contained process to review
and remedy such complaints.
Plaintiffs may be troubled by the fact that Congress’s
approach does not include damage-remedies for wrongfully
rejected applicants. But plaintiffs’ disenchantment changes
nothing. By specifically adopting an appeals process which
does not provide monetary relief, Congress has displaced claims
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for relief based on state common law. A common law suit for
recovery of monetary damages is merely an “attempt . . . to
bypass the Exchange Act” and the process Congress envisioned
therein. MM&S Fin., 364 F.3d at 912.
Turning to an immunity analysis, the Exchange Act reveals
a deliberate and careful design for regulation of the securities
industry. This regulatory model depends on the SEC’s
delegation of certain governmental functions to private SROs,
such as NASD’s administration and scoring of the Series 7
exam. Absent the unique self-regulatory framework of the
securities industry, these responsibilities would be handled by
the SEC—“an agency which is accorded sovereign immunity
from all suits for money damages.” DL Capital Group, LLC v.
Nasdaq Stock Mkt., 409 F.3d 93, 97 (2d Cir. 2005). When an
SRO acts under the aegis of the Exchange Act’s delegated
authority, it is absolutely immune from suit for the improper
performance of regulatory, adjudicatory, or prosecutorial duties
delegated by the SEC. See Weissman v. NASD, 500 F.3d 1293,
1298–99 (11th Cir. 2007).
The comprehensive structure set up by Congress is
suggestive both of an intent to create immunity for such duties
and of an intent to preempt state common law causes of action.
The elaboration of duties, allowance of delegation and oversight
by the SEC, and multi-layered system of review show
Congress’s desire to protect SROs from liability for common
law suits. “The presumption that a remedy was deliberately
omitted from a statute is strongest when Congress has enacted
a comprehensive legislative scheme including an integrated
system of procedures for enforcement.” Feins v. Am. Stock
Exch., Inc., 81 F.3d 1215, 1221 (2d Cir. 1996) (quoting Nw.
Airlines v. Transp. Workers Union of Am., 451 U.S. 77, 97
(1981)).
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The claims here challenge errors in developing the Series 7
exam, scoring the exam, and reporting scores correctly. All of
these duties exist only because of NASD’s Exchange Act
responsibilities. See 15 U.S.C. § 78o(b)(7). NASD has no free-
standing obligation to design, score, or report results—its
obligations to do so arise only because of regulations under the
Exchange Act. See 17 C.F.R. § 240.15b7-1. Were it not for the
regulations that flow from the Exchange Act, NASD would not
be administering the Series 7 examination. Courts have
consistently barred suits which seek monetary relief for actions
taken by agency regulators — or those acting in their place —
in performance of their regulatory, adjudicatory, or prosecutorial
duties. See, e.g., MM&S Fin., 364 F.3d at 912; Desiderio, 191
F.3d at 208; Niss v. NASD, 989 F. Supp. 1302, 1307–08 (S.D.
Cal. 1997). Congress did not intend the regulatory duties at
issue here to be enforced by common law causes of action.
Where courts accord immunity to SROs, the protection has
been absolute. Courts have declined to craft exceptions for bad
faith (Desiderio, 191 F.3d at 208), fraud (DL Capital Group,
409 F.3d at 98), negligence, or even gross negligence (Sparta,
159 F.3d at 1215). Unable to breach this formidable barrier of
precedent or sneak past it in disguise, plaintiffs attempt to vault
over it. Even if there is no exception for negligence generally,
plaintiffs insist no immunity should exist for the negligent
performance of purely ministerial functions. Plaintiffs borrow
this distinction from tort cases in which courts sought to balance
the scope of common law immunity with the doctrine’s central
purpose of insulating decision-making from the harassment of
prospective litigation. In such cases, the invocation of absolute
immunity would deprive a litigant of any remedy. See Westfall
v. Erwin, 484 U.S. 292, 295 (1988). But this feint fails when
Congress itself has resolved the question. The functional
approach to immunity is appropriate only when the question has
not been decided by express statutory enactment. Forrester v.
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White, 484 U.S. 219, 223–25 (1988). Here, plaintiffs, who have
taken full advantage of the existing remedial scheme, try to
defeat the SRO’s immunity to get a different and more generous
remedy than Congress saw fit to provide.
Congress designed a specific remedial structure for
wrongful denials of membership and did not provide monetary
relief. Having considered the issue, Congress decided
consequential damages should not be given for improper denials
of membership under the Exchange Act.
Regardless of the approach taken, the conclusion is not
changed: plaintiffs cannot bring a common law cause of action
based on errors in design, scoring, or reporting of results of the
Series 7 exam. These duties arise only under the Exchange Act,
and they are not open to suit under state common law theories.
Both preemption and regulatory immunity support our holding,
and the intent of Congress is clear under each approach.
Because we find such claims are not allowable under the
Exchange Act, we affirm the district court’s judgment of
dismissal.
So ordered.