Is FINRA constitutional? According to the D.C. Circuit’s November 2024 opinion in Alpine Securities Corp. v. FINRA, FINRA proceedings may be unconstitutional in one narrow set of circumstances. Alpine, a broker-dealer firm alleged to have broken FINRA rules, is the subject of expedited proceedings in which FINRA hopes to expel Alpine from membership. Alpine asked the district court and then the D.C. Circuit to halt the proceedings, arguing that either (1) FINRA is a private entity wielding too much government power (the private nondelegation argument) or (2) FINRA is a government entity whose officers were not properly appointed (the appointments clause argument). For additional details about Alpine and another case bearing on FINRA’s constitutionality that also is currently pending in the D.C. Circuit, please see “FINRA’s Sky Isn’t Falling (Just Yet),” Expect Focus – Life, Annuity, and Retirement Solutions (September 2024).
After argument, the majority opinion (written by Judge Millett and joined by Chief Judge Srinivasan) agreed with Alpine on a single substantive piece of the nondelegation point: FINRA may not expel Alpine until either “full review by the SEC of the merits of any expulsion decision” or the time to seek SEC review runs out. With that one limitation, FINRA’s expedited proceedings against Alpine may, for now, move forward.
Judge Walker, who would have invalidated FINRA’s activities wholesale, partially concurred and partially dissented. His principal disagreement with the majority dealt with the quantum of SEC oversight necessary to avoid constitutional issues. In the majority’s eyes, the SEC’s eventual de novo review of FINRA actions was usually enough to satisfy the private nondelegation doctrine. “That is because many types of sanctions imposed by FINRA, short of expulsion, can be undone later. Censures can be rescinded, fines can be returned, and cease-and-desist orders can be lifted.” And unlike the dissent, the majority did not believe that merely having to participate in FINRA proceedings would inflict any injury that could not later be remedied should Alpine prevail. An injunction was therefore warranted only to prevent FINRA from expelling Alpine before the SEC weighed in.
To the dissent, on the other hand, it was problematic that FINRA’s “enforcement powers require[] no contemporaneous oversight by the SEC,” meaning that the “SEC does not control FINRA’s investigations, its prosecutions, or its initial adjudications.” So “[u]ntil the SEC accepts an appeal from a final FINRA decision, FINRA wields its enforcement powers unilaterally.” (An ironic assertion given Judge Walker’s previous writing in this same case that FINRA’s activities were “controlled by the government” “from start to finish … with little to no room for private control.”)
A more complete picture will probably emerge in time, and the Supreme Court may ultimately decide to wade in. For now, however, this Alpine decision means business as usual for FINRA in nearly all respects.
