Broker Uses Recent Supreme Court Decisions In Case Against FINRABroker Uses Recent Supreme Court Decisions In Case Against FINRA
An attorney representing Frank Black in his case against FINRA believes the issue of whether the self-regulatory organization’s enforcement proceedings are constitutional could hit the Supreme Court within the next several years.
A broker fighting with the Financial Industry Regulatory Authority over being barred is using Supreme Court decisions from the past year in his motion to overturn his case. It’s the latest case questioning FINRA's constitutionality, with attorneys representing the client thinking this case (or one like it) could go before the Court in several years’ time.
In his motion for summary judgment, plaintiff Frank Black is citing several Supreme Court decisions from the past year, including the 6-3 decision in SEC v. Jarkesy limiting the Securities and Exchange Commission’s use of in-house judges.
According to Adi Dynar, an attorney with the Pacific Legal Foundation who is representing Black, the Supreme Court decision bolsters his case because it shows that some lawsuits cannot be litigated by “the administrative agency.”
“It has to be brought in an Article III court because otherwise it violates the regulated party’s jury trial rights,” he said, referring to federal courts established by Congress.
Black initially filed his suit in October 2023, alleging FINRA had designated itself a private organization while wielding the authority of a government agency (and doing so without oversight).
Black was the founder of Southeast Investments. During a routine cycle exam, FINRA argued that he hadn’t properly recorded whether he made mandated periodic inspections of his branch offices. In a disciplinary proceeding, FINRA accused Black of supplying fabricated “branch inspection documents” and lying in on-the-record questioning with examiners.
Black appealed the decision to the SEC, but Dynar said the commission finally responded after years of silence only after he filed suit in North Carolina in late 2023. According to Dynar, the SEC “partially” affirmed FINRA’s decisions, and eventually, courts decided that the partial affirmation meant the entire case had to be sent back to FINRA hearing officers (according to Dynar, the case in North Carolina was stayed while this unfurled).
However, this led Black and Dynar to submit the motion for the judge to rule in their favor without a trial, wielding the Supreme Court decisions released in the interim.
FINRA declined to comment for this story.
Black’s main arguments center on Jarkesy, which stems from the case of George Jarkesy, a hedge fund manager whom the SEC charged with fraud in 2013. After he lost a decision before one of the commission’s administrative law judges (ALJs), Jarkesy brought a suit targeting the constitutionality of the setup.
The Fifth Circuit Court of Appeals agreed with Jarkesy, and the Supreme Court later affirmed their decision in a 6-3 ruling. In a dissent, Justice Sonia Sotomayor noted that the ruling could cause “chaos” across the government, with agencies like the Federal Trade Commission, Department of Agriculture and Environmental Protection Agency also employing such administrative proceedings.
In Black’s case, as well as other cases in the past year, the plaintiffs are trying to apply this logic to FINRA (though FINRA employees are not nominally part of the government as SEC judges are). However, Black and others argue that FINRA is, for all intents and purposes, an arm of the government that can levy fines and bar registrants from the industry.
According to Benjamin Edwards, a professor at the William S. Boyd School of Law at the University of Nevada, Las Vegas, Black’s argument could be rejected entirely, or the court could decide that FINRA must make minor procedural changes demanding earlier SEC involvement that wouldn’t disrupt FINRA’s ability to enforce its rule.
“Or it might be that a lot of FINRA’s enforcement is just going to have to shift from outside of FINRA, maybe to the SEC or to somewhere else, which is going to tax the SEC’s resources,” Edwards said.
The Pacific Legal Foundation has become one of the country’s most prominent conservative law firms, with an extensive history of arguing before the Supreme Court. The firm has argued 20 cases, including 18 victories before the Court. (Five of those victories have come since 2020 after the Supreme Court shifted to the right with President Donald Trump’s appointment of justices Neil Gorsuch, Brett Kavanaugh and Amy Corey Barnett.)
Edwards described Black’s counsel in the case as well-funded and committed to “being on the cutting edge” of these kinds of cases, with a record of success. He suspected Pacific Legal wanted to raise these questions to the Supreme Court and focus the case “squarely on the constitutional issues” as much as possible.
“You can see this is an issue they pay very close attention to,” he said. “And I think the reality is the Supreme Court’s trend and case law has created a degree of uncertainty around FINRA enforcement that would’ve been unthinkable 10 years ago.”
The Black case parallels several others challenging FINRA’s legality, most prominently a case involving Alpine Securities that’s unfolded in Washington D.C.’s Circuit Court over the past several years.
In 2019, FINRA charged Alpine with mishandling client funds and charging unreasonable fees. A hearing panel barred Alpine from the industry and ordered it to pay more than $2 million in restitution. FINRA then moved to expedite the decision when it argued Alpine was continuing the alleged misconduct, leading the firm to argue the organization is illegal.
In a victory for Alpine last fall, the federal appeals court ruled FINRA couldn’t “unilaterally” expel firms and that the SEC must affirm such a decision before it’s finalized.
In Black’s case, Dynar expected the district court to decide on its motion for summary judgment at some point this year. He said some cases (including Alpine) were further “up the pipeline” for landing at the Supreme Court. Still, he said Supreme Court justices could hear one of the cases during the 2026 term, if not sooner.
“But in the next five years, something will go up to the Supreme Court,” he said.
