Alpine Securities has fired back at FINRA in their ongoing legal skirmish with the regulator, accusing it of trying to “regulate the Constitution’s structural protections to second-class status.”
The Utah-based brokerage firm's brief was the latest move to prevent FINRA from expelling it from the industry (the firm is a frequent adversary with the self-regulatory organization). Alpine is accusing FINRA of acting unconstitutionally in wielding the enforcement powers of a federal agency while claiming to be a private actor.
“If FINRA seeks to exercise federal executive power, it must be bound by the constraints on that power,” the brief read. A governmental agency cannot, as it receives and delegates governmental power, strip away the protections that are inextricably interwoven with that same power.”
The fight began in 2019, when FINRA charged Alpine with mishandling client funds; several years later, a FINRA hearing panel expelled Alpine, mandating it pay $2.3 in restitution to clients. FINRA later moved to expedite the banishment, arguing Alpine was breaking a cease-and-desist order.
But Alpine filed a suit challenging the regulator’s legal foundation. The firm scored a temporary victory in the D.C. Circuit after a three-judge panel put a halt on Alpine's expulsion as the case progressed, with Circuit Judge Justin Walker writing that Alpine may successfully prove that FINRA “impermissibly exercises significant executive power.”
FINRA fired back last month, arguing that any attempt to fell the agency threatens not only the regulator itself but also “Congress’s time-tested approach of using private entities to assist in fulfilling important regulatory responsibilities and public functions.” FINRA also warned that if its enforcement powers were scuttled “investors would be left exposed to deception, overreaching and outright theft by unscrupulous industry members.”
It’s a warning Alpine doesn’t buy.
“If FINRA’s sky-is-falling policy arguments sound familiar, it is because they have been made in every major case about the Constitution’s structure in recent memory,” Alpine’s attorneys wrote. “The Supreme Court has rejected overblown policy arguments, and this court should too.”
Alpine’s arguments describe Article II of the Constitution and the rules of the executive branch. To Alpine, FINRA’s “hearing officers” running arbitration and disciplinary proceedings, essentially act as unchecked arms of the executive branch. But, according to FINRA, they’re essentially independent officers, and not accountable to government officials.
Judge Walker’s opinion throwing weight behind Alpine’s arguments has inspired a run of other reps facing disciplinary challenges to file suit against FINRA on similar grounds. In October, the D.C. Circuit ruled against Eugene Kim, a rep formerly with National Securities Corporation who’d been disciplined by FINRA for some allegedly shady private placement dealings. Kim directly cited Walker, though the court eventually ruled against him.
There are others. FINRA previously accused Sidney Lebental, a rep with tenures at Deutsche Bank, Merrill and Bank of America Securities of “spoofing” client trades. Lebental filed back in federal court, repeatedly citing the Alpine case and accusing FINRA’s enforcement division as functioning “as an agent of the executive branch.” The case is ongoing.
In North Carolina, the Pacific Legal Foundation, a conservative law firm with an extensive Supreme Court track record, is representing Frank Black, who was barred from the industry several years ago.
In an interview with WealthManagement.com, Adi Dynar, the attorney representing Black, argued FINRA had operated in a “constitutional gray area.” While he stressed there were several significant differences between Alpine’s arguments and his work with Black, he nevertheless hoped the spate of suits against the regulator would fuel reform “either through litigation, rulemaking or legislation.”
After a three-judge panel on the D.C. Circuit issues a decision, either party can request the entire Circuit to hear the case. If that decision is appealed, the Supreme Court would then decide whether it wants to take the case.
According to Ben Edwards, a professor at the William S. Boyd School of Law at the University of Nevada, Las Vegas,, the number of cases in different federal court circuits boosts the chances of a Supreme Court hearing.
“If you have one ruling in the D.C. Circuit and you end up with a different ruling in the Fourth Circuit, it significantly increases the likelihood the Supreme Court is going to want to hear the case,” he said.
