While FINRA decides whether to appeal a circuit court panel’s ruling that it cannot speedily expel reps without SEC oversight, the regulator believes it can “implement measures” to meet the judges’ demands, according to a FINRA spokesperson.
The self-regulatory organization said in a statement on Tuesday that a three-judge panel’s decision last week to call for SEC oversight of any FINRA decision to expedite tossing a registrant out of the brokerage industry does not affect its day-to-day operations.
The regulator said it can find ways to “address the framework” identified by the judges while still "carrying out its mission of protecting investors and ensuring market integrity," according to a FINRA spokesperson.
For over a year, the case centered on FINRA’s attempts to expel Utah-based Alpine Securities over alleged misconduct has drawn attention from the agency’s critics and supporters, as it could impact how the regulator supervises registered reps.
Last week, a three-judge panel in the D.C. Court of Appeals ruled FINRA must let the SEC review its decision to expel a registrant before it is allowed to do so. While the court stressed that it did not rule on the “ultimate merits” of Alpine’s claims that FINRA acts unconstitutionally, it ruled that Alpine would face “irreparable harm” if expelled without SEC review.
On Tuesday, a FINRA spokesperson said the decision would not impact FINRA’s existence.
“Following last week’s Court of Appeals decision, FINRA remains confident that the self-regulatory model will continue to support the unique fairness and integrity of America’s securities markets—as it has for more than 200 years,” the spokesperson said.
The case springs from a longtime skirmish between FINRA and the Salt Lake City-based Alpine. In 2019, FINRA charged Alpine with mishandling client funds and charging unreasonable fees. Alpine responded by claiming its due process rights were violated by FINRA’s use of virtual arbitration hearings during COVID-19. In March 2022, a FINRA hearing panel expelled Alpine from the industry and ordered it to pay $2.3 million in restitution.
Later, the panel moved to expedite the expulsion, arguing Alpine had defied a cease-and-desist order. This is what was at the center of Friday’s decision in federal appeals court, with Obama-era appointee U.S. Circuit Judge Patricia Millett noting the expedited expulsion is stopped, but FINRA’s proceedings against the firm can continue.
Alpine responded with several court challenges alleging FINRA’s entire legal foundation was suspect. In its argument, Alpine claimed that FINRA’s hearing officers who run arbitration panels are essentially judges who oversee the de facto enforcement of U.S. securities laws. According to Alpine, these individuals are hired by FINRA, are not accountable to the government, and are, therefore, unconstitutional.
In previous interviews with WealthManagement.com, securities attorneys and supporters of FINRA’s work worried that an unfavorable ruling for the agency could harm consumers.
Ben Edwards, a professor at the William S. Boyd School of Law at the University of Nevada, Las Vegas, previously called the case a potential “headshot” to FINRA that poses a “systemic risk” to financial markets saddled with a toothless regulator and an underfunded SEC that can’t pick up the slack.
Edwards said the latest decision risks turning FINRA enforcement actions into government actions, which could impose due process violations (i.e., a registered rep could assert a Fifth Amendment right against self-incrimination during an arbitration proceeding).
“At the least, by requiring SEC review, this will slow down the ability of FINRA and other SROs to remove bad actors,” Edwards said.
Justin Walker, one of the three judges on the D.C. panel, dissented in part because he said the court should dismiss FINRA’s expedited proceeding against Alpine.
In his dissent, Walker (who was nominated by President Donald Trump during his first administration) argued that FINRA “unilaterally” exerts enforcement powers and “subverts the constitutional design.”
“In short, Congress requires FINRA to ‘enforce’ both its own rules and federal securities law, without adequate control by the president,” he wrote. “That arrangement violates the constitution.”
After a three-party panel on the D.C. Circuit issues a decision, either party can request the entire Circuit to hear the case. If any party wishes to appeal that decision, the Supreme Court would have to decide whether it wants to hear the case.
According to Edwards, this case (or another like it) seems likely to reach the Supreme Court “at some point,” as other pending cases in different circuits around the country are making similar arguments.
