A law firm with a record for arguing against “government overreach” before the Supreme Court has entered the legal battle weighing the Financial Industry Regulatory Authority’s constitutionality, arguing in a new suit that a former rep was illegally barred from the industry.
The Pacific Legal Foundation is representing Frank Black pro bono in his case against FINRA filed late last month in North Carolina federal court in the Fourth Circuit.
In the suit, Black argues that FINRA acts as a private organization while wielding the powers of a government agency, and that the group violates the Constitution by appointing board members and hearing officers without executive oversight.
In an interview with WealthManagement.com, Adi Dynar, an attorney with the Pacific Legal Foundation representing Black, argued FINRA had long operated in a “constitutional gray area.”
“FINRA tries to act as a private organization when it suits them and tries to act as a quasi-governmental organization when it suits them,” he said. “That really isn’t the best way to go about regulating the industry.”
"FINRA believes it has strong defenses to the claims being made,” said a FINRA spokesperson in an emailed statement. “FINRA’s constitutionality has been affirmed by courts time and again in similar challenges."
But Black’s case is just one of a string of legal battles being fought across the country. The most prominent is in D.C.’s federal appeals court, which temporarily halted the Utah-brokerage firm Alpine Securities' industry expulsion by FINRA after a federal judge argued the agency may be unconstitutional.
The Alpine suit, Black’s case and numerous other complaints popping up from aggrieved brokers increase the chance FINRA’s fate could be decided by the Supreme Court, where conservative litigants feel they have a new advantage, according to Ben Edwards, a professor at the William S. Boyd School of Law at the University of Nevada, Las Vegas.
“The issue is getting pressed again and again at this point,” he said. “It’s just going to keep coming.”
Black founded Southeast Investments in 1997 in Charlotte, N.C.; between 2010 and May 2015 the firm had between 114 and 133 registered reps across seven to 38 branch offices, FINRA estimated. Many worked out of their homes or in insurance offices, the agency said.
Dynar argued that FINRA investigated Black and Southeast as part of a routine cycle exam, speaking with Black and reaching out to several brokers working remotely for the firm.
FINRA requires periodic inspections of branch offices, and while Black allegedly made those trips, FINRA believed he hadn’t kept enough receipts as proof of his travel, according to Dynar. Eventually, regulators moved to bar him from the industry, in what Dynar argued was a “vastly disproportionate action.”
But according to FINRA’s disciplinary proceeding against Black and the subsequent in-house appeal, Black allegedly supplied FINRA examiners “branch inspection documents” that were fabricated.
FINRA also accused Black of lying to examiners in on-the-record questioning about these visits. As of May 2019, FINRA barred Black from the industry; he appealed to the SEC, but has yet to get a decision, according to his federal court suit.
Black’s case also questions FINRA’s ability to act against reps altogether. It argues that FINRA’s board of governors, adjudicators and hearing officers are appointed in violation of the Constitution’s Appointments Clause because they “exercise significant governmental and executive power.” Dynar accused FINRA of also violating the Due Process Clause and Seventh Amendment by imposing civil penalties on Black without a jury trial.
Pacific Legal Foundation is a non-profit firm that “defends Americans’ liberties when threatened by government overreach and abuse,” according to its website.
Since it was established in 1973, it’s become one of the most prominent (and successful) conservative law firms at the Supreme Court, with 19 overall cases and 17 victories. (The group calls itself a “perennial presence” at the Court.) Five of those victories have come since 2020, as the Court shifted to the right with President Donald Trump’s appointment of justices Neil Gorsuch, Brett Kavanaugh and Amy Corey Barnett.
These include Sackett vs. Environmental Protection Agency, which limited the protections of the Clean Water Act (as well as the EPA’s power), as well as Tyler v. Hennepin County, in which justices found Minnesota erred by seizing the plaintiff's property for unpaid property taxes because the state could not take in more than it was owed.
The PLF also focuses on cases to put an end to agency adjudication like the kind FINRA practices, according to its site and Dynar. While Black’s case is the PLF’s only current suit against FINRA, Dynar cited suits filed against the National Credit Union Association and Federal Deposit Insurance Corporation that made similar arguments.
While there are some differences in the nuances of the defenses, he agreed that the Black case and Alpine suit were “going to the heart of the same problem” by challenging FINRA’s in-house adjudications.
“Everyone is aware that there are these nefarious prosecutions and adjudications happening,” he said. “And we hope that a lawsuit like this or a lawsuit like the Alpine Securities lawsuit in the D.C. Circuit will fuel that sort of reform, either through litigation, rulemaking or legislation.”
Edwards had been expecting Pacific Legal to file a lawsuit against FINRA for some time, describing the firm as being “active in challenges to the regulatory state.” He believes cases like Black’s will be an “enormous nuisance” for FINRA and other SROs, as they’ll be increasingly spending money defending themselves in federal court throughout the country, with attorneys raising the constitutionality question in an attempt to set precedent and those representing disciplined brokers who smell blood in the water.
But a case like Black’s could be the first step towards the Supreme Court. Often, when considering whether to hear a case, it’ll look at whether there are divergent rulings in different circuits that need to be resolved. As an example, one of the cases in the D.C. circuit and Black’s case in North Carolina may end with contrasting opinions.
“To the extent that those are different, it’ll signal to the Supreme Court it should probably take the case,” Edwards said.
Edwards worried that this rush of cases questioning FINRA’s constitutionality would cause the agency’s enforcement arm to “grow timid” in pushing out bad brokers. To Edwards, cases like the Black and Alpine suits were ones FINRA had to “win and win convincingly” to remain effective.
“What the Constitution means in this space is contested right now. It had a settled meaning for a while, but we’re playing with a new Supreme Court,” he said. “How far they’re going to go, I don't know.”
Edwards was among several individuals and organizations filing amicus briefs supporting FINRA in the Alpine Securities suit last Friday. Other defenders of the regulator included the North American Securities Administrators Association (NASAA), the Public Investors Advocate Bar Association (PIABA), and the New York Stock Exchange, arguing a ruling against FINRA could have debilitating effects on financial markets.
Also, SROs from outside the financial services industry, ranging from the National Securities Clearing Corporation to the Horseracing Integrity and Safety Authority submitted briefs in support of FINRA, fretting about how a ruling against that organization could cripple their own operations.
