On July 5, the D.C. Circuit Court of Appeals halted the Financial Industry Regulatory Authority (FINRA), a privatized entity that serves as an organization that regulates U.S. brokerage firms and exchange markets, from expelling Alpine Securities Corporation, a Salt Lake City-based brokerage firm. Following a hasty motion for injunction pending appeal, the D.C. Circuit held a disciplinary hearing challenging the overall authority of FINRA and whether the organization is still legally fit to maintain enforcement proceedings. Earlier this year, FINRA filed an expedited enforcement action against Alpine to stop the brokerage firm from selling investment securities due to an alleged cease-and-desist order violation. In response to FINRA’s claims, Alpine filed an appeal to block its expulsion, arguing that FINRA acted unconstitutionally and that the organization’s hearing officers may hold executive power that should only be exercised by the U.S. president or representatives under his supervision.
Historically speaking, FINRA has always prevailed successfully within a federal court setting, as brokers, dealers and investment firms seek to challenge its authority by claiming the organization is a state actor. With that, FINRA’s response largely remains the same. Since FINRA is not a government-appointed financial regulator but instead a voluntary membership-based self-regulatory organization (SRO), expulsion would be no different than being kicked out of a YMCA or a local gym. Despite this, Justin Walker, the circuit court judge currently presiding over the case, concurs with Alpine’s sentiment.
Earlier this year, FINRA filed an expedited enforcement action against Alpine to stop the brokerage firm from selling investment securities due to an alleged cease-and-desist order violation."
“Alpine has raised a serious argument that FINRA impermissibly exercises significant executive power,” stated Walker, as reported by JDSupra. Additionally, Walker explained that FINRA’s hearing officers act similarly to administrative law judges who, according to the Supreme Court’s opinion in the case of Lucia v. SEC, are assigned under the appointments clause of the U.S. Constitution. The appointments clause is set in place to empower the president to nominate public officials under the guidance, supervision and confirmation of the U.S. Senate. With that, Judge Walker stated that although FINRA is a private corporation, its enforcement actions are ultimately controlled by the U.S. government, making it necessary for the organization’s hearing officers to be subject to some legislative plan.
At this time, FINRA has yet to express its current views on Alpine, at least not publicly. If Alpine's appeal ultimately prevails, the landscape of FINRA enforcement moving forward could change drastically. Will FINRA aim to have its hearing officers appointed and vetted by the president? Could SEC administrative law judges preside over upcoming disciplinary hearings, removing FINRA's self-rule adjudication authority? Only time will tell what the future will hold for FINRA and other SRO financial entities. In response to the potentially significant ruling, it remains evident that FINRA is currently evaluating the full scope of feasible repercussions and planning its subsequent actions. Additionally, other financial entities subject to government regulation should vigilantly monitor FINRA's response moving forward, while all parties currently undergoing FINRA enforcement proceedings should also examine the potential ramifications for their defense strategies.
