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FINRA supported by regulators, lawyers association in suit filed by expelled firm

On Behalf of | Nov 14, 2023 | FINRA Compliance

The Financial Industry Regulatory Authority has drawn additional support in defending a legal challenge to its constitutionality, according to InvestmentNews.

The North American Securities Administrators Association (NASAA) and the Public Investors Advocate Bar Association (PIABA) filed briefs in the case with U.S. Court of Appeals for the D.C. Circuit.  NASAA is an organization of state securities regulators while the PIABA is a lawyers trade association. They both backed FINRA against an appeal by expelled brokerage firm Alpine Securities Corporation claiming that the authority is unconstitutional.

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.”

The DC court of appeals is now weighing the case and will rule on 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.

In its amicus brief, NASAA emphasized the vital role FINRA plays in regulating the financial industry. “FINRA provides essential services like these that state and federal securities regulators, thousands of firms, hundreds of thousands of registered persons, and millions of American investors rely upon,” NASAA counsel Zachary Knepper wrote. “If this Court were to find that FINRA’s rule writing and enforcement mechanisms were unconstitutional, this Court could disrupt the essential functioning of securities regulation and the Nation’s securities markets, harming the economy.”

The PIABA’s amicus brief also stressed the importance of FINRA in regulating broker-dealers, and said the authority’s enforcement powers do not violate the Constitution because the Securities and Exchange Commission has oversight over FINRA’s operations and enforcement actions. “Instead of accepting responsibility for its misconduct, Alpine now seeks to have FINRA declared unconstitutional in its entirety, and to shut down FINRA’s ability to regulate brokers and broker-dealers and police their conduct,” PIABA wrote. “The result that Alpine envisions would create market chaos and eviscerate meaningful protections for the investing public.”

The Department of Justice also supported FINRA’s constitutionality in its own brief filed recently.

In July, the DC Court of Appeals upheld a preliminary injunction against FINRA allowing Alpine to continue to conduct business during its appeal.

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