DC Circuit Enjoins FINRA Disciplinary Proceeding, Questions Constitutionality of Hearing Officers
Government/Regulatory Enforcement
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  • DC Circuit Enjoins FINRA Disciplinary Proceeding, Questions Constitutionality Of Hearing Officers

    On July 5, the United States Court of Appeals for the D.C. Circuit granted an emergency injunction blocking the Financial Industry Regulatory Authority (“FINRA”) from halting the securities business of Alpine Securities Corporation (the “Company”) through an expedited hearing process pending the Company’s appeal challenging the constitutionality of FINRA’s enforcement proceedings.  Alpine Securities Corporation, et al v. Financial Industry Regulatory Authority, Inc., 1:23-cv-01506-BAH (July 5, 2023).  While noting that this was not a decision on the merits, the court found that the Company had shown a likelihood that it will succeed on the merits in its challenge to the structure of FINRA enforcement actions, having at this early stage “raised a serious argument that FINRA impermissibly exercises significant executive power.”

    The Company sued FINRA in federal district court in Tampa, Florida in October 2022, after a FINRA hearing panel issued a decision in an enforcement action against the Company that included, among other things, a cease-and-desist order and an order to pay $2.3MM in customer restitution.  FINRA had initiated an expedited hearing process against the Company for allegedly violating a preexisting order and sought to block the Company from selling securities.  In response, the Company filed an emergency motion seeking an injunction, pending appeal, to block its expulsion from FINRA, arguing that FINRA’s action violates the Constitution because FINRA hearing officers impermissibly wield executive power that may be exercised only by the United States’ President and officers under his supervision.

    While the constitutional issues have yet to be litigated on the merits, Circuit Judge Justin Walker in a concurring opinion drew notable parallels between FINRA’s hearing officers and the SEC’s administrative law judges (“ALJs”), echoing the Supreme Court’s analysis in Lucia.  In Lucia, the Supreme Court reasoned that ALJs “exercised significant authority” such that they were officers of the United States subject to the Appointments Clause of the Constitution because they had discretion to exercise an important government function—enforcing federal securities laws—including with authority akin to a federal district judge (e.g., demanding testimony, ruling on motions, and overseeing hearings).

    In his concurring opinion in Alpine, Judge Walker reasoned that FINRA hearing officers, who “enforce securities laws and decide parties’ rights,” are “near carbon copies” of ALJs, and “if the ALJs in Lucia exercised ‘significant’ executive power, then FINRA hearing officers probably do too.”  Judge Walker identified two specific constitutional issues unique to FINRA hearing officers that may infringe upon the President’s ability to hold subordinates accountable:  (1) FINRA hearing officers, who are private employees, are not appointed by a government body pursuant to the Appointments Clause; and (2) they cannot be removed by the SEC (although it has significant oversight over FINRA’s activities) other than for cause.

    It remains to be seen how the order may impact FINRA’s programmatic approach while the matter is pending.  If the Company ultimately prevails, the impact will likely be significantly disruptive not only to FINRA but potentially to other self-regulatory organizations and enforcement regimes.  Between Alpine, Lucia, and the recent grant of certiorari in Jarkesy v. SEC, 34 F.4th 446 (5th Cir. 2022), to hear several challenges to SEC administrative proceedings next term, the future processes for securities enforcement are particularly uncertain.