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Federal appeals court to weigh challenge to FINRA’s constitutionality

On Behalf of | Aug 18, 2023 | FINRA Compliance

A federal appeals court will be considering a challenge to the constitutionality of the Financial Industry Regulatory Authority, reports Bloomberg Law.

Last month the case reached the US Court of Appeals for the DC Circuit, which granted an emergency injunction blocking FINRA from expelling Utah-based Alpine Securities Corporation.  Alpine was charged by FINRA in 2019 with mishandling client funds, conducting unauthorized trades and charging unreasonable fees. In March 2022, FINRA barred the company from the industry and ordered it to pay $2.3 million in restitution.

Alpine then filed a lawsuit asking for an injunction, claiming that FINRA’s structure and operation including its Board of Governors and enforcement units were in violation of the Constitution’s separation of powers. The firm based the challenge on its claim that FINRA sought to enforce the nation’s securities laws without authorization from the executive branch. Alpine said FINRA was “unaccountable and immune at every turn.”

A federal court in Tampa denied the request for a preliminary injunction, saying the claim likely lacked merit. But that decision was overturned by the appellate court ruling in a 2-1 decision. In the order, Circuit Judge Justin R. Walker wrote, “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. That may be a constitutional problem.”

In July, FINRA filed a motion to have the Circuit Court’s decision overturned, saying Alpine’s argument relied on legal theories that “every court” had previously rejected, and that “FINRA is not a state actor subject to the Constitution’s rules on appointments.”

The court of appeals said it will now weigh the case and resolve the issue of whether FINRA is a state actor improperly operating without oversight from the executive branch.  The outcome of the case is seen as having major implications for the constitutionality of FINRA’s regulatory efforts and enforcement functions.

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