## Facts

- The New York Stock Exchange (NYSE) operated as a self-regulatory organization (SRO) with regulatory authority delegated by the Securities and Exchange Commission under the Securities Exchange Act.
- Investors alleged that NYSE specialist firms engaged in improper trading practices (including trading ahead of customer orders and interpositioning) that disadvantaged public investors.
- Lead plaintiffs (including CalPERS) alleged the NYSE failed to regulate specialists and failed to maintain a fair and orderly market.
- Plaintiffs also alleged the NYSE publicly represented that its market was fair and had integrity, and that investors relied on those representations when deciding to trade on the NYSE.
- Plaintiffs claimed they suffered losses from trading at prices distorted by the specialists’ undisclosed misconduct.

## Issues

1. Whether the NYSE, as an SRO, has absolute immunity from private damages claims attacking its alleged failures to regulate specialists and maintain a fair and orderly market.
2. Whether investors have standing to assert a private Rule 10b-5 claim against the NYSE based on alleged misrepresentations about the integrity of its market and its regulatory oversight that purportedly induced trading on the NYSE.

## Decision

- The Second Circuit affirmed dismissal of claims challenging the NYSE’s alleged regulatory failures, holding the NYSE was absolutely immune for conduct undertaken in its regulatory capacity.
- The court rejected arguments that immunity is lost where plaintiffs allege the NYSE acted in bad faith, abandoned its duties, or permitted fraud, reasoning that immunity turns on the nature of the function, not the quality of performance.
- The Second Circuit vacated the district court’s ruling that plaintiffs lacked standing under Rule 10b-5 for misrepresentation claims and remanded for further proceedings.
- The court distinguished between immune regulatory conduct and potentially actionable public statements made by the NYSE as a speaker to the market.

## Legal Principles

- SROs are entitled to absolute immunity from private damages suits when performing regulatory functions delegated under the Exchange Act, including oversight intended to ensure a fair and orderly market.
- Absolute immunity for regulatory functions is determined by the character of the function performed, not by allegations that the regulator acted wrongfully, inadequately, or even intentionally.
- Courts will not create a fraud-based exception to SRO absolute immunity where the challenged acts are within the SRO’s regulatory sphere.
- Rule 10b-5 may apply to “any person” making material misstatements or omissions in connection with securities transactions, and an SRO is not categorically excluded when it speaks to the investing public.
- Standing to assert a Rule 10b-5 claim is not categorically barred merely because the alleged statements concern an exchange’s integrity or regulatory oversight; the sufficiency of pleaded fraud elements is a separate inquiry.

## Conclusion

The Second Circuit held that the NYSE was absolutely immune from damages claims premised on alleged failures to regulate specialists and maintain a fair and orderly market, but it allowed investors to proceed past a categorical standing bar on Rule 10b-5 claims based on the NYSE’s alleged public misrepresentations, remanding for further evaluation of the securities-fraud allegations.


Cal. Pub. Emps.’ Ret. Sys. v. N.Y. Stock Exch., Inc., 503 F.3d 89 (2d Cir. 2007)