News & Insights

Finra Faces Litigation That Questions Its Governing Authority

In an effort to delay FINRA’s expedited death sentence it imposed following its ruling that, Alpine Securities be expelled from the industry over allegations it misused customer funds and violated compliance rules, the broker dealer has taken direct action against FINRA and filed an injunction pending appeal. In its Emergency Motion for Injunction Pending Appeal, Alpine argued FINRA’s enforcement action violates the Constitution, as its hearing officers “impermissible wield executive power that may be exercised only by the President and officers under his supervision.”

In the written opinion granting Alpine’s injunctive relief, Washington D.C. Circuit Judge Justin Walker questioned whether FINRA actually has authority to render a decision on Alpine’s fate as the organization ultimately attempts to exercise executive powers by way of non-government employees. Judge Walker questioned whether a constitutional issue is created when private employees, who do not act under the President, exercise executive powers of the United States.

Judge Walker noted the Supreme Court determined Administrative Law Judges (“ALJ’s”) within the SEC were Officers of the United States who must be appointed in accordance with the Appointments Clause. Judge Walker indicated that FINRA hearing officers are near “carbon copies” of ALJ’s as both enforce the nation’s securities laws and levy sanctions that carry the full weight and force of federal law. However, Judge Walker differentiated the two by stating ALJ’s are government appointed positions, while FINRA hearing officers are non-appointed private employees. The private employee distinction is thereby what creates the potential of a constitutional conflict. He also noted a second potential constitutional issue is present when one considers the fact that FINRA hearing officers are shielded from removal by the SEC except for cause. Judge Walker indicated this likely infringes on the President’s ability to execute the laws by holding his subordinates accountable for their conduct.

When explaining his concerns regarding the constitutionality of the organization, Judge Walker noted that “FINRA hearing officers execute government laws subject to a government plan, with little to no room for private control.” Judge Walker indicated that while FINRA may ultimately prevail on these issues, it was his opinion there is a “serious argument that FINRA hearing officers exercise significant executive power” and “it is undisputed that they do not act under the President.”

Alpine is appealing FINRA’s imposed expulsion from the industry and a ruling is not expected until next year. However, if the appellate court agrees with Judge Walker’s opinion and rules in favor of Alpine, FINRA ability to carry out its responsibilities will be in jeopardy.