An embattled brokerage firm is planning yet another appeal after suffering its latest setback in its attempts to question the constitutionality of the broker industry’s chief regulatory agency, FINRA.
Processing Content
Alpine Securities and its affiliate Scottsdale Capital Advisors were rebuked in federal court in Washington, D.C., last week by Judge Beryl Howell, who found several holes in their legal arguments against the Financial Industry Regulatory Authority, the broker-dealer industry’s self-regulator. Alpine Securities has been locked in a long-running legal tussle with FINRA since March 2022, when regulators hit Alpine with a $2.3 million fine and ordered it expelled from the industry for allegedly charging customers unreasonable fees and other expenses.
The dispute made an initial trip through federal district court and the D.C. Circuit Court of Appeals before going back to the U.S. District Court for the District of Columbia to resolve various constitutional questions raised by Alpine. The firm has argued that FINRA unconstitutionally straddles the line between being a nongovernmental and governmental entity. Alpine notes that FINRA, although technically a private organization, wields enforcement authority over wide swaths of the securities industry.
Why the SEC is finding little to celebrate in its record $18B penalty haul
Judge Howell’s rejection of Alpine’s arguments and Alpine’s plans to appeal
Judge Howell on Thursday rejected Alpine’s contention that FINRA officers should be subject to direct control by the federal executive branch. In a sternly worded passage, she wrote, “This argument starts with wishful thinking and then collapses under the weight of spiraling aspiration.”
Howell’s order dismissing Alpine’s suit made much of the fact that most FINRA disciplinary decisions and rules are subject to review by the Securities and Exchange Commission, which is a government agency.
“Thus, while the SEC’s actions to confirm, ratify, or enforce FINRA’s decisions undoubtedly constitute state action, that does not ‘transform’ FINRA’s disciplinary proceedings into state action,” Howell wrote.
A FINRA spokesperson welcomed the order, saying it “believes the decision is well supported and correct.” One of Alpine’s lawyers, Maranda Fritz, said in a statement that she thinks Judge Howell’s order ignores recent pertinent developments in case law.
“We’ll now appeal to the D.C. Circuit and look forward to having the arguments fully and fairly considered,” Fritz said.
How highly confident investors can struggle to detect fraud, according to FINRA
Legal challenges mount against FINRA and the SEC
The case is just one in a series of challenges in recent years questioning regulators’ authority on constitutional grounds. In June 2024, the SEC was dealt a blow by the Supreme Court in a case questioning its previous practice of bypassing courts and sometimes bringing fraud cases before in-house tribunals known as administrative law judges.
Lawyers for George Jarkesy, a former advisor and hedge manager who was accused by the SEC in 2013 of making misstatements about a pair of funds holding $24 million in client assets, successfully argued that the system stripped their client of his Seventh Amendment right to a jury trial.
Plaintiffs have since cited the Jarkesy case in their attempts to cast doubt on FINRA’s constitutionality. Alpine’s challenge also invoked the right to a jury trial guaranteed by the Seventh Amendment. Judge Howell dismissed those arguments after again noting that firms sanctioned by FINRA can always file “an appeal of the sanctions to the SEC and then on to the court of appeals.”
“Should either body agree with plaintiffs that the sanction may not be imposed without a jury trial, the sanction may simply be reversed,” Howell wrote.
More RIAs are outsourcing their compliance. Is that a problem?
Judge finds FINRA is a private organization subject to SEC review
Howell also rejected arguments against entrusting a private organization like FINRA with so much authority over the brokerage firms. Howell noted that FINRA’s roots are in the National Association of Securities Dealers, a private organization set up in 1939 “without any government intervention.”
“Simply put, no FINRA employee or board member is an officer of the United States,” and “since FINRA is not a part of the government, much less the Executive Branch, the president has no constitutionally endowed supervisory authority over FINRA.”
Howell came back repeatedly to the point that virtually all FINRA actions are subject to review by the SEC.
“FINRA does not outlaw certain individuals or entities from participating in the securities market; instead, the SEC wields this power and may do so upon FINRA’s recommendation,” the judge wrote. “The SEC retains ‘plenary power’ to modify both FINRA’s generally applicable rules and FINRA’s own application of those rules to any given case.”
Elsewhere, Howell noted that, “The SEC at any time may ‘abrogate, add to, and delete from’ any FINRA rule. Although FINRA may take the first step in investigating and disciplining an entity for violation of its rules, an SEC regulation, or a statutory provision, any adjudication by FINRA is subject to … review by the SEC.”
Appeals court agrees FINRA can’t expel firms without SEC review
Dochtor Kennedy, the founder of AdvisorLaw and a lawyer for brokers in other challenges of FINRA’s constitutionality, said in an email that the review system places too much weight on the conclusions and recommendations of FINRA’s internal investigative procedures. Regular courts, by contrast, offer far more opportunities for presenting countervailing evidence and mounting other defenses.
As a result, Kenned said, “the ‘record’ reviewed by the accountable governmental agency (i.e., the SEC) is incomplete, inadequate, and prejudices the member firm or associated person. As such, the accountable governmental agency’s review is symbolic at best.”
Alpine’s protracted legal fight against FINRA hasn’t been entirely without result. The firm scored a partial victory in the D.C. Court of Appeals when it got that court to agree that FINRA most likely has no authority to “unilaterally” expel brokerage firms without first obtaining the assent of the SEC. FINRA later changed its own rules to prevent it from expelling any member firm without an SEC review.
-1024x683.jpg "Judge Who Helped Violent Illegal Alien Evade ICE Faces New Test")
