D.C. Court of Appeals Curtails FINRA’s Unilateral Expulsion Powers, Avoids Addressing Broader Constitutionality Challenges to FINRA

On November 22, 2024, the Court of Appeals for the District of Columbia Circuit issued its decision in Alpine Securities Corp. v. Financial Industry Regulatory Authority and discussed, although largely avoided deciding, a host of constitutional challenges to FINRA.  The scope of the court’s decision was limited by various factors, including the fact that the court reviewed only whether Alpine Securities Corporation, a broker-dealer, was entitled to a preliminary injunction against an expedited proceeding by which FINRA sought to expel Alpine from FINRA membership.  The court ruled that such an injunction should have been granted by the district court, in that Alpine had shown that it would incur irreparable harm if it was expelled from FINRA before the SEC reviewed the merits of such an order.  As the Court of Appeals observed, the regulatory scheme otherwise would allow FINRA, as a private regulatory entity and without any SEC review of its decision on the merits, to effectively decide who can engage in the securities industry.

The Court of Appeals further ruled that Alpine showed a likelihood of success on its argument that the lack of governmental review prior to effectively being expelled from the securities industry violated the private nondelegation doctrine.  According to that doctrine, a private entity that has been statutorily delegated a regulatory role must be supervised by a government actor.  The court observed that the SEC does not exercise ultimate control over FINRA expulsion proceedings because the orders take effect immediately and the consequences of expulsion can make any later review by the SEC “a largely academic exercise.”

A lengthy dissenting opinion written by Judge Justin R. Walker is noteworthy.  Judge Walker expressed the view that FINRA’s expedited enforcement proceeding against Alpine should be enjoined in its entirety.  This is because, according to Judge Walker, the problems with FINRA’s enforcement proceedings “run even deeper” than noted by the majority opinion, in view of the significant executive authority unilaterally exercised by FINRA when it investigates, prosecutes and initially adjudicates allegations against a brokerage firm.  Such executive powers can be exercised only by properly appointed and accountable executive officers.

To say the least, the ongoing constitutional challenges to FINRA’s considerable powers are worthy of close attention, as the Alpine case proceeds and as similar challenges are raised by FINRA member firms in defending against future enforcement proceedings.