On November 22, 2024, the D.C. Circuit Court of Appeals enjoined the Financial Institution Regulatory Authority (“FINRA”) from expelling a member firm without Securities and Exchange Commission (“SEC”) review. Alpine Securities v. FINRA, No. 23-5129, ECF Doc. No. 2086156 (D.C. Cir. Nov. 22, 2024). The Court’s decision, in a case that has been closely watched because it challenges the regulator’s disciplinary program on constitutional grounds, largely avoided the broader constitutional issues raised. It held instead that the plaintiff, a broker-dealer facing expulsion from the industry following a FINRA disciplinary hearing, would suffer irreparable harm because expulsion would essentially force it out of business long before the SEC could review FINRA’s action, which likely violates the private nondelegation doctrine.
As previously covered, plaintiff moved for an injunction against FINRA in the Middle District of Florida after FINRA sought to bar it from selling securities for allegedly overcharging customers and misusing customer funds. The firm argued, among other things, that FINRA's authority was unconstitutional because it was immune from Presidential supervision and control. The United States intervened, and the case was transferred to the United States District Court for the District of Colombia.
The district court denied the firm’s injunction request, finding that FINRA likely was a private actor to which constitutional claims could not apply. Scottsdale Cap. Advisors Corp. v. FINRA, 678 F.Supp.3d 88, 106 (D.D.C. June 7, 2023). The district court further rejected the firm’s assertion of the private nondelegation doctrine, finding no likelihood of success on the merits because FINRA’s authority ultimately was subordinate to SEC control and oversight. Id. The district court was not persuaded that Congress impermissibly delegated authority to FINRA, observing that the SEC may suspend or revoke FINRA’s registration, must approve and may modify FINRA’s rules, and, upon petition, reviews any FINRA adjudication. Because the SEC ultimately has oversight over FINRA’s actions, the district court found that FINRA’s role in overseeing the securities industry is not constitutionally suspect.
The D.C. Circuit disagreed in part, reversing and remanding for further proceedings on the merits. The Court observed that constitutional safeguards apply whether or not FINRA is a private actor if FINRA exercises executive power. Applying that framework, the Court found that the assurance of SEC review provided no comfort to FINRA members, at least in the context of an expulsion action like that faced by the plaintiff, because as a practical matter, the member firm would be forced out of business long before any SEC review could take place. And because an expulsion resulting from a FINRA proceeding would take effect immediately, the Court noted, the SEC would not in fact exercise control over FINRA’s proceeding. As a result, the Court held that the plaintiff had demonstrated a likelihood of prevailing on the merits of its private nondelegation doctrine argument. After determining the remaining preliminary injunction factors also warranted relief, the Court reversed the district court and remanded the case for further proceedings.
Although the Court’s ruling was narrow, its reasoning, and the reasoning of a partial dissent and concurrence authored by Judge Walker, which proposed to enjoin FINRA’s expedited enforcement proceedings entirely, left open the prospect that future broader constitutional challenges to FINRA’s enforcement authority could succeed.
FINRA’s authority has been challenged recently on several fronts, as we have discussed, including in the wake of the Supreme Court’s decision in Securities and Exchange Commission v. Jarkesy, 144 S. Ct. 2117 (2024). And the D.C. Circuit has now communicated skepticism about FINRA’s ability to act independently as a quasi-regulatory actor, with enforcement powers, outside of a clearly delegated mandate.
Together with the coming change in administration and the Supreme Court’s recent appetite for curtailing agency power, it is possible that the next four years may bring dramatic changes to how FINRA seeks to enforce its rules.
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