SW Legal studies in Business

Securities Exchanges Must Follow Their Own Rules When Disciplining Members
Description Appeals court held that a suit filed by a securities firm against the NYSE for being expelled without a hearing may have violated NYSE self-regulation rules. However, before such a matter may be appealed to the courts, the SEC must hear an appeal of the NYSE's action.
Topic Securities Law
Key Words Securities Exchanges; Self-Regulation; Flipping; Appeals
C A S E   S U M M A R Y
Facts MFS Securities was alleged to have engaged in stock flipping buying or selling security for a customer followed by the sale or purchase of the same security for a profit of one-eighth of a point, the spread between bid and ask prices, so as to collect that profit, plus charge the customer a commission on the transaction. Under the securities laws, it is illegal for floor brokers to trade on an exchange for their own accounts or for accounts in which they have an interest. MFS had charges filed against it by the SEC. The same day, the NYSE expelled MFS from NYSE membership and revoked its trading privileges. MFS sued, contending that it did not receive a pre-termination hearing before the NYSE, in violation of NYSE rules.

MFS must seek administrative review before the SEC before suing the NYSE. Once the SEC has reviewed the matter, then the decision may be appealed to the courts. The securities law, which gives the exchanges substantial authority to regulate their own conduct and that of their members, requires that the exchanges comply with their own rules. It is for the SEC to decide if the NYSE properly followed its procedures in revoking MFS's membership in the exchange. A decision regarding that matter may be appealed to the courts for review after the SEC's review of the appeal is completed.

Citation MFS Securities Corp. v. NYSE, 277 F.3d 613 (2nd Cir., 2002)

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