The financial industry’s self-regulator likely doesn’t have the authority to “unilaterally” expel brokerages it claims have engaged in misconduct, a federal appeals court ruled, in a case that Wall Street is watching closely.
The Financial Industry Regulatory Authority must let the U.S. Securities and Exchange Commission weigh in before it can cast out one of its members, a three-judge panel of the U.S. Court of Appeals for the District of Columbia found. The law requires that FINRA’s regulatory role be supervised by a government actor, U.S. Circuit Judge Patricia Millett wrote in an opinion filed on Friday.
The decision calls into question the regulator’s ability to move swiftly to kick members out of FINRA in “expedited proceedings” that bypass the SEC. The case threatens to upend a self-regulatory model used by resource-constrained federal watchdogs in which they turn to industry-backed agencies for help.
The case centers on FINRA’s attempt to ban Alpine Securities Corp. from the brokerage industry after finding that it misused client funds and increased customer fees without proper notice, allegations the brokerage denies. Brian Barnes, Alpine’s attorney, has called FINRA an “unaccountable enforcer of federal law” that acts like a government agency but without the constitutional boundaries.
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FINRA, known for its role in monitoring misconduct of firms and individual brokers, has contended that it operates with adequate supervision from the SEC.
Must halt expulsion
The appellate panel decided that FINRA must halt its expulsion of Alpine until the SEC reviews the case, but can continue with its proceeding against the company. The judges said they would leave it to the lower court to determine the merits of Alpine’s constitutional challenges.
“Expulsion would likely put Alpine out of business, and would do so before the SEC performs a full review of FINRA’s decision,” wrote Millett, a Barack Obama appointee.
Maranda Fritz, a lawyer for Alpine, said after the ruling that FINRA “exercises enormous power over participants in the securities industry while insisting that it need not abide by the Constitution.”
FINRA said in a statement that it was reviewing the decision.
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Wall Street watches
The lawsuit has attracted the attention of Wall Street, which is overseen by a number of self-regulatory organizations, or SROs, including stock exchanges and clearinghouses. Those SROs have warned of significant disruptions to the markets if Alpine wins the case.
Other groups, including one represented by former Attorney General William Barr, are supporting Alpine’s stance that citizens aren’t guaranteed their constitutional rights under the current structure.
U.S. Circuit Judge Justin Walker, a Donald Trump appointee, dissented in part to the opinion, saying FINRA should be stopped altogether from wielding enforcement authority.
“The problems with FINRA’s enforcement proceedings run even deeper,” since it “wields significant executive authority when it investigates, prosecutes, and initially adjudicates allegations against a company required by law to put itself at FINRA’s mercy,” he wrote.
Chief Circuit Judge Sri Srinivasan, also an Obama appointee, was on the panel as well.
The case is Alpine Securities Corp. v. Financial Industry Regulatory Authority, 23-5129, U.S. Court of Appeals for District of Columbia Circuit.
