FINRA Enforcement Authority Turns on Looming Appeals Court Fight

Wall Street’s self-regulator will defend its ability to conduct enforcement activities before a US appeals court Thursday in a case it’s calling an existential threat.

Alpine Securities Corp. says the Financial Industry Regulatory Authority acts as a governmental entity and violates constitutional provisions that are applicable to it when it takes on an enforcement role. And if FINRA isn’t a state actor, it shouldn’t be enforcing federal law, Alpine said in a briefing.

“This suit poses an existential threat not only to FINRA, but also to Congress’s time-tested approach of using private entities to assist in fulfilling important regulatory responsibilities and public functions—an approach that dates to the Founding,” FINRA said in an October brief.

At issue before the US Court of Appeals for the District of Columbia Circuit is whether the brokerage firm is entitled to a preliminary injunction pausing FINRA’s enforcement proceeding against it while the firm litigates its constitutional challenge.

Constitutional arguments are expected to be at the forefront in presentations to the three-judge panel because the injunction inquiry looks at the likelihood of Alpine’s success on the merits.

Alpine last year persuaded that court to stay FINRA’s hand while the appeal is pending, on an emergency basis, after a lower court denied an injunction. The firm “raised a serious argument” on the merits, Judge Justin R. Walker said in a concurrence to that divided July 2023 appellate order, while acknowledging he might reach a different conclusion after briefing and argument.

But Alpine now faces a panel with a different ideological composition. Walker, appointed by then-President Donald Trump, remains on the panel. In place of a George H.W. Bush appointee, Karen LeCraft Henderson, and one appointed by Joe Biden, Bradley N. Garcia, the new panel has two Barack Obama appointees—Chief Judge Sri Srinivasan and Judge Patricia A. Millett—alongside Walker.

While the case isn’t overtly political, it fits into a broader wave of litigation questioning federal agency authority. Some observers say that such separation of powers cases, once brought to the US Supreme Court, are part of a long-term strategy by conservatives to chip away at the federal bureaucracy.

Indeed, a ruling in a Supreme Court case this term over the Securities and Exchange Commission’s in-house judges, SEC v. Jarkesy, could affect the outcome here, attorneys say.

The court’s questioning at oral argument in November focused on the right to a jury trial in a fraud context, signaling a narrow ruling that could nevertheless affect how the SEC handles securities fraud cases.

FINRA itself is a financial industry self-regulatory organization, supervised by the SEC, that writes and enforces ethical rules for broker-dealer firms and brokers in the US, according to its website. It enforces its own rules, those of the Municipal Securities Rulemaking Board, SEC regulations, and federal securities laws, and oversees more than 624,000 brokers across the country.

$5,000 Monthly Fee

In the disciplinary proceeding underlying the appeal, FINRA said that Alpine, citing higher costs, imposed $5,000-per-month fees on retail accounts that remained and improperly categorized some as abandoned.

The regulator’s enforcement arm alleged “that Alpine violated FINRA’s rules by stealing more than $54.5 million from its customers through excessive fees and the unauthorized conversion of customer securities,” according to its brief.

A FINRA hearing panel ruled against Alpine, once among the largest US clearing firms, and the regulator moved to expel it.

Alpine disputes the organization’s conclusions. “FINRA is seeking to micromanage the fully disclosed fees that can be charged by a firm in a costly segment of the market,” an attorney for Alpine, Maranda Fritz, who practices in New York, said in a September email to Bloomberg Law.

Alpine and a financial firm with common ownership, Scottsdale Capital Advisors Corp., fought back against the industry group’s power in a suit filed in October 2022. FINRA’s structure and operation violate the separation of powers, the appointments clause, and the delegation of powers, Scottsdale and Alpine said.

The district court rebuffed their request for a preliminary injunction, opening the door to its banishment from FINRA while the court case proceeded—which would prevent it from operating entirely. The emergency ruling from the D.C. Circuit in July kept the status quo in place. Now the parties will seek to sway the new panel of judges.

FINRA has been allowed to divide its argument time with the US government, which intervened in the case.

Cooper & Kirk PLLC and Fritz represent Alpine. Gibson, Dunn & Crutcher LLP represents FINRA. The Department of Justice represents the government.

The case is Alpine Sec. Corp. v. Fin. Indus. Regul. Auth., Inc., D.C. Cir., No. 23-05129, oral argument scheduled 2/8/24.