The Second Circuit Court of Appeals ruled Wednesday that Financial Industry Regulatory Authority, Inc. (FINRA) does not the authority to bring court actions to collect disciplinary fines.
FINRA is a “self-regulatory organization” as a national securities association registered with the Securities and Exchange Commission (SEC) that is responsible for conducting investigations and commencing disciplinary proceedings against [FINRA] member firms and their associated member representatives relating to compliance with the federal securities laws and regulations.
FINRA has the power to initiate a disciplinary proceeding against any FINRA member or associated person for violating any FINRA rule, SEC regulation, or statutory provision. The organization initiates its own proceedings against offenders, conducts its own hearings, and houses an internal appeals process through the National Adjudicatory Council (NAC). NAC decisions may be appealed to the SEC, and from the SEC to the United States Court of Appeals.
For years, FINRA and its members assumed that FINRA could haul violators into court to collect fines. Following this decision from the Second Circuit Court of Appeals, FINRA sanctions will no longer wield power over firms that fear a FINRA-imposed "Wall Street exile," reports The New York Times.
What prompted the change?
FINRA's predecessor, the National Association of Securities Dealers (NASD), slapped Fiero Brothers, a New York penny-brokerage, with a $1 million fine, costs, and Wall Street banishment in 2000. Fiero Brothers appealed and lost, but refused to pay the fine. FINRA sued Fiero Brothers in New York state court, and the state court upheld the fine under basic contract law principles.
Fiero Brothers filed a declaratory action in federal court, trying to prove that FINRA did not have the authority to collect fines through court proceedings. FINRA claimed that its authority came from the Securities Exchange Act, and won in the district court. The Second Circuit disagreed. Noting that statutory construction and Congressional intent were not on FINRA's side, the Second Circuit Court of Appeals ruled for Fiero Brothers.
This ruling is being hailed as a "game changer," reports Reuters. Will FINRA's lack of authority affect your Wall Street clients? Would you advise them to avoid paying FINRA disciplinary fines in light of this ruling?
- Fiero v. Financial Industry Regulatory Authority, Inc. (FindLaw's CaseLaw)
- Historic Second Circuit Decision Finds FINRA Can't Collect Disciplinary Fines (Forbes)
- Remand Order Following an Order to Vacate Arbitral Award Upheld (FindLaw's First Circuit blog)