On Friday, the same day the Supreme Court granted cert in a case raising the private nondelegation doctrine, the U.S. Court of Appeals for the D.C. Circuit ruled that at least some of the powers exercised by the Financial Industry Regulatory Authority (FINRA) are insufficient. It concluded that it was not authorized. Federal oversight violates the private non-delegation principle.
Judge Millett wrote a 41-page opinion for the panel. Alpine Securities Co., Ltd. vs. FINRAChief Justice Srinivasan also joined. Judge Walker concurred in part and dissented in part, saying he would have viewed the FINRA challenge more favorably than the majority.
Judge Millett summarized the case and the court’s conclusions as follows:
The U.S. securities industry is regulated by both private entities and the federal government. The origins of these private regulatory bodies, called self-regulatory organizations, date back centuries to when groups of securities traders adopted self-governing rules to conduct their business and ensure public confidence in their business.
Currently, the Financial Industry Regulatory Authority (“FINRA”), a private company, regulates and supervises much of the securities industry. But Congress has covered these private self-regulatory practices with federal law. As is relevant here, federal law effectively requires most companies and individuals engaged in securities transactions to participate in FINRA as a condition of engaging in that business. Meanwhile, federal law subjects FINRA to the oversight of the Securities and Exchange Commission (“SEC”) and requires FINRA to ensure that its members comply with both FINRA’s own rules and federal securities laws. .
In 2022, FINRA sanctioned one of its members, Alpine Securities Co., Ltd., for violating FINRA’s private rules regarding member conduct and imposed a cease and desist order against Alpine. Alpine subsequently filed suit in federal court challenging FINRA’s constitutionality.
While this case was pending, FINRA concluded that Alpine had violated the cease and desist order and began expedited proceedings to expel Alpine from FINRA’s membership. Alpine then filed a preliminary injunction against expedited proceedings in the district court, arguing that FINRA was unconstitutional because expedited proceedings against Alpine would violate either the private nondelegation doctrine or the Appointments Clause. I asked for it. The district court denied the preliminary injunction.
We currently reverse only to the extent that the district court allowed FINRA to expel Alpine without opportunity for SEC review. Alpine is entitled to a limited preliminary injunction because Alpine has demonstrated that it would face irreparable harm if expelled from FINRA and the securities industry as a whole before the SEC considers the pros and cons of FINRA’s decision. There is. Alpine has also indicated it may be successful in arguing that the lack of government review prior to expulsion violates the private non-delegation doctrine. Accordingly, we find that FINRA may not expel Alpine before Alpine undergoes a full review by the SEC of the merits of the expulsion decision or before the time period for Alpine to seek such review has elapsed.
At the same time, we find that Alpine has not shown that it would suffer irreparable harm by participating in the expedited proceeding itself, unless FINRA is unable to expel Alpine pending the SEC’s independent review. As such, Alpine has not shown that it is entitled to a preliminary injunction that permanently halts proceedings.
Because this action was brought before us in a preliminary injunction capacity, we do not necessarily resolve the ultimate merits of Alpine’s constitutional issues, but rather the extent to which Alpine’s success in private nondelegation matters. Our determination of probability is based solely on the initial record of this case. case. The final merits of Alpine’s claims will be determined by the remanding district court.
Judge Walker’s 29-page opinion, concurring in parts and dissenting in part, begins:
Article 2 of the Constitution begins, “Executive power is vested in the President of the United States.” This means that civilians cannot exercise important administrative powers. Additionally, no person in the government, except the president and executive officers, may be appointed and removed pursuant to Article 2.
The Financial Industry Regulatory Authority is nominally a private company. Investigates, prosecutes, and adjudicates violations of federal securities laws. These laws generally prohibit broker-dealers from conducting business unless they are affiliated with FINRA.
The majority now believes that the Constitution likely requires government review before FINRA can remove a company from its position and thereby put it out of business. This retention is a constitutional victory.
But this is only a partial victory, as FINRA’s enforcement process problems run deeper. FINRA exercises significant enforcement powers in investigating, prosecuting, and issuing initial judgments against companies that are required by law to comply with FINRA. This type of executive power can only be exercised by the president (who is responsible to the state) and his executive officers.
(Responsible to him).Although FINRA has caused irreparable harm by ignoring its principles through an “unlawful process led by an illegitimate decision maker,” this court has denied the requested preliminary injunction in its entirety. This should be prevented by acknowledging that
I respectfully disagree with the majority’s decision to deny that relief.
I think Alpine Securities will definitely apply for arbitration. The question is whether FINRA will do the same (or file a motion for en banc reconsideration).
