Lawyers expect more challenges to the Financial Industry Regulatory Authority’s enforcement powers in the wake of a recent U.S. Supreme Court ruling, according to AdvisorHub.
In a 6-3 decision, the nation’s highest court said that people accused of fraud by the Securities and Exchange Commission have the right to a jury trial in federal court. The court said the in-house proceedings the SEC has used in some civil fraud complaints violate the Constitution.
The ruling came in the case of a Houston hedge fund manager, George Jarkesy, who was fined $300,000 and ordered to pay $680,000 in allegedly ill-gotten gains after being accused by the SEC of misleading investors about who served as his funds’ prime broker and auditor and about their investment strategies and holdings.
The 5th U.S. Circuit Court of Appeals dismissed the penalties against Jarkesy and his Patriot28 investment adviser, saying the case should have been heard in a federal court instead of before one of the SEC’s administrative law judges.
Lawyers who spoke with AdvisorHub discussed the impact the court’s decision could have on FINRA’s mechanisms for enforcing rules among its members.
Among those weighing in was Russ Ryan, senior litigation counsel for the New Civil Liberties Alliance. The advocacy group has filed a brief in support of broker-dealer Alpine Securities, which was expelled from membership in FINRA after various violations, but has challenged its suspension and called FINRA’s enforcement unconstitutional.
“There are at least a handful of FINRA targets who have already made the argument that they cannot be fined by FINRA without a jury trial,” Ryan said. “I think there’ll be more, and eventually it’ll get before a court, and the courts will decide whether FINRA disciplinary proceedings where there’s no jury available can continue to go forward and impose fines on people.”
He added that, “because FINRA routinely imposes punitive, quasi-governmental fines in non-jury proceedings, which can be enforced only by the SEC, I expect there to be future challenges to such fines under the Seventh Amendment,” which protects the right for citizens to have a jury trial in federal courts with civil cases where the claim exceeds a certain dollar value.
AdvisorHub spoke with another lawyer whose organization has filed a friend of the court brief in favor of FINRA in the Alpine case, but did not want to be identified because of the pending litigation. That attorney expects more brokers to cite the Supreme Court ruling in challenging disciplinary actions brought by FINRA, but said it could also lead to more settlement negotiations.
Both the SEC and FINRA might “go to brokerage firms and say, ‘Look, you have two choices. One is, we’re gonna take you to court, following Jarkesy, but if we win that case, you’re done. We’re taking your license. Or we can agree not to seek full penalties if you agree to do this within our forum,’” the lawyer said.
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 attorneys at Lewitas Hyman include former senior attorneys at the SEC whose legal experience and industry knowledge make them uniquely qualified to provide counsel on securities regulatory, compliance and enforcement matters. Our attorneys fully understand the regulatory scrutiny financial professionals and their firms face from the various regulators that oversee the financial services industry. If your firm is facing an investigation from a regulatory agency, please contact Lewitas Hyman at (888) 655-6002 or through our online contact form.