While FINRA decides whether to appeal a district court panel's ruling that it cannot speedily deport representatives without SEC oversight, the regulator believes it can “implement measures” to comply with the judges' requests, according to a FINRA spokesman.
The self-regulatory organization said in a statement Tuesday that a three-judge panel's decision last week to require SEC oversight of any FINRA decision to expedite a registrant's removal from the brokerage industry does not affect its day-to-day operations .
The regulator said it could 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 spokesman.
For more than a year, the case centered on FINRA's efforts to oust Utah-based Alpine Securities for alleged misconduct has drawn attention from critics and supporters of the agency, as it could affect how the regulator oversees representatives. registered.
last week, a panel of three judges in the Court of Appeal of the JI ruled FINRA must allow the SEC to review its decision to exclude a registrant before it is allowed to do so. While the court emphasized that it did not rule on the “ultimate merits” of Alpine's claims that FINRA is acting unconstitutionally, it did rule that Alpine would face “irreparable harm” if it were barred without SEC review.
On Tuesday, a FINRA spokesman said the ruling will not affect FINRA's existence.
“After 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 stems from a long-standing feud between Salt Lake City-based FINRA and Alpine. In 2019, FINRA accused Alpine of misusing client funds and charging unreasonable fees. Alpine responded by claiming that its due process rights were violated by FINRA's use of virtual arbitration hearings during COVID-19. In March 2022, a FINRA hearing panel banned Alpine from the industry and ordered it to pay $2.3 million in damages.
The trial court later moved to expedite the eviction, arguing that Alpine had contested a cease and desist order. That was at the heart of Friday's ruling in federal appeals court, with Obama-era appointee Judge Patricia Millett noting that the expedited deportation has been halted, but FINRA proceedings against the firm could continue. .
Alpine responded with several court challenges claiming that FINRA's entire legal foundation was suspect. In its argument, Alpine contended that FINRA hearing officers who preside over arbitration panels are essentially judges who oversee the de facto application of US securities laws. According to Alpine, these individuals are employed by FINRA, are not accountable to the government, and are therefore unconstitutional.
In previous interviews with WealthManagement.com, securities lawyers and supporters of FINRA's work worried that a decision unfavorable to 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 “headbutt” for FINRA that poses a “systemic risk” to financial markets overcrowded with a regulator toothless and an underfunded SEC that can't fix the fade.
Edwards said the latest decision risks turning FINRA's enforcement actions into government actions, which could impose due process violations (ie, a registered representative could invoke a Fifth Amendment right against self-incrimination during an arbitration process).
“At the very least, by requiring SEC review, it will slow the ability of FINRA and other SROs to root out bad actors,” Edwards said.
Justin Walker, one of three judges on the D.C. panel, dissented in part because he said the court should stay FINRA's expedited proceeding against Alpine.
In his dissent, Walker (who was appointed by President Donald Trump during his first administration) argued that FINRA “unilaterally” exercises enforcement powers and “destroys the constitutional model.”
“In short, Congress requires FINRA to 'enforce' its own rules and federal securities law, without adequate presidential oversight,” he wrote. “This deal violates the constitution.”
After a three-party panel in the D.C. Circuit issues a decision, either side can request that the entire circuit hear the case. If either party wants to appeal that decision, the Supreme Court will have to decide whether it wants to hear the case.
According to Edwards, this case (or another like it) looks set to reach the Supreme Court “at some point,” as other cases pending in various circuits around the country are making similar arguments.