The Financial Industry Regulatory Authority (Finra), the self-regulatory organization overseeing member broker-dealers under federal law, is encountering a series of constitutional challenges following a pivotal decision by the US Court of Appeals for the District of Columbia. In late November, this federal appeals court delivered a noteworthy opinion in the case of Alpine Securities Corp. v. FINRA, which questions Finra’s enforcement capabilities under the private nondelegation doctrine.
This doctrine mandates that a private entity given regulatory responsibilities by Congress must be supervised by a government body. The decision, applying only to Finra’s expedited proceedings, refrained from addressing several of Alpine’s broader constitutional claims, leaving significant issues unresolved. These issues now proceed to the lower courts, where they could potentially threaten the foundation of Finra’s enforcement powers under its internal tribunal structure if the challenges are upheld.
Finra plays a role parallel to that of the Securities and Exchange Commission (SEC) in regulating the securities industry. Should the challenges limit its powers, Finra might struggle to maintain its current level of enforcement over federal securities laws. The case could further ascend to the US Supreme Court unless it is stayed, returning the deliberations to the district court, which is slated to deliberate over the numerous constitutional arguments posed by Alpine.
Alpine’s claims include whether Finra acts as a state actor, which would subject it to constitutional safeguards if affirmed. The court’s differentiation between Finra’s enforcement of its own rules and those of the federal securities laws hints at potentially greater constitutional concerns with the latter. Additionally, significant is the matter involving the Seventh Amendment, where Alpine contests that Finra’s tribunal violates the right to a jury trial. This claim finds potential support in the SEC v. Jarkesy decision, where it was adjudged that the SEC’s in-house procedures breached the Seventh Amendment.
Although the Alpine decision’s impact applies directly to member firms, it poses implications for registered individuals facing Finra’s enforcement. Several registered brokers, inspired by the case, have initiated analogous lawsuits, contending constitutional breaches in the operational procedures of Finra. This situation, sparked by a notable appeal, leaves several constitutional questions regarding Finra’s methods poised for thorough judicial scrutiny in upcoming proceedings.
These emerging challenges to Finra’s authority exemplify the evolving dynamics within securities regulation and emphasize the need for close legal examination. The ongoing case is Scottsdale Cap. Advisors Corp. v. FINRA, currently pending in the District of Columbia.