News & Insights

JUDICIAL CHALLENGE TO FINRA AUTHORITY DISMISSED BY FOURTH CIRCUIT

A panel of three judges in the Fourth Circuit in the case of Frank Black & Southeast Investments N.C., Inc. v. FINRA dismissed a constitutional challenge to FINRA’s authority to regulate and punish security brokers. The panel determined that it lacked jurisdiction to render a decision on the basis that the prior Order underlying the challenge to FINRA’s powers has not been made final.

The challengers who filed the appeal are a broker and firm based in Charlotte, North Carolina. The broker and firm were found to be in violation of FINRA rules for failing to properly conduct branch inspections and failing to supervise business communications. The decision and subsequent punishment was appealed to the SEC, which upheld the order and kept the fines imposed for the violations, subject to its appeal process. The challengers appealed to the Fourth Circuit.

The broker and firm asserted an Article III Court, which handles cases arising from federal law, in the proper forum when constitutional issues are present. FINRA countered, as a private entity, it is not subject to constitutional arguments. FINRA claimed, as a private self-regulatory organization, operating within the bounds of the Securities Exchange Act, it can exercise a primary supervisory role over its members, subject to comprehensive SEC commission oversight.

The panel ultimately determined federal court was not the proper venue for the proceeding. The Court held, it “has routinely concluded that we lack jurisdiction to review an agency order remanding a case, or portion thereof, to a lower tribunal for further proceedings.” The panel noted the SEC’s decision requires further proceedings that could develop the record by way of witness testimony. The Court reported the broker and firm will be entitled “to challenge FINRA’s decision by an appeal to the SEC and then, if necessary, to the Fourth Circuit.”

This challenge represents the most recent attempt to determine whether FINRA’s regulatory authority violates the U.S. Constitution.  Stay tuned as this area is quickly developing and there are more cases, with different theories, on the horizon.