The Supreme Court on Friday granted certiorari in a case raising the civil non-mandate doctrine. The U.S. Court of Appeals for the DC Circuit has concluded that at least some of the powers wielded by the Financial Industry Regulatory Authority (FINRA) are exercised without appropriate action. Federal oversight violates the private non-delegation principle.
Judge Millett wrote a 41-page opinion for the panel. Alpine Securities Corp. v. FINRAChief Justice Srinivasan joined them. Judge Walker concurred in part and dissented in part with the ruling. Because he would have been more inclined to challenge FINRA than most.
Judge Millett summarized the case and the court’s conclusions:
The U.S. securities industry is regulated by both private companies and the federal government. The history of these private regulators, called self-regulatory organizations, dates back to when groups of securities traders adopted self-governing rules to conduct business and ensure public confidence in their operations.
Today, the Financial Industry Regulatory Authority (“FINRA”), a private corporation, regulates and supervises much of the securities industry. However, Congress imposed federal law on these private self-regulatory practices. Related federal law effectively requires most companies and individuals that trade securities to join FINRA as a condition of engaging in that business. Under federal law, FINRA is subject to the oversight of the Securities and Exchange Commission (“SEC”), and FINRA is required to ensure that its member firms comply with both FINRA’s own rules and the federal securities laws.
In 2022, FINRA sanctioned one of its members, Alpine Securities Corporation, for violating FINRA’s individual rules for member conduct and imposed a cease-and-desist order against Alpine. Alpine filed suit in federal court challenging the constitutionality of FINRA.
While that lawsuit was pending, FINRA concluded that Alpine had violated the cease-and-desist order and began expedited proceedings to expel Alpine as a FINRA member. Alpine then sought a preliminary injunction in the district court against the expedited proceedings, arguing that FINRA’s expedited action against Alpine was unconstitutional because it violated the private nondelegation doctrine or the Appointments Clause. The district court denied the preliminary injunction.
We now reverse only the extent to which the district court permitted FINRA to expel Alpine without an opportunity for SEC review. Alpine is entitled to a limited preliminary injunction because it has demonstrated that it would suffer irreparable harm if it were kicked out of FINRA and the securities industry as a whole before the SEC reviews the merits of FINRA’s decision. Alpine has also shown promise of success in its argument that the government’s failure to review prior to expulsion violates the private nondelegation doctrine. Accordingly, we assert that FINRA cannot expel Alpine before Alpine has received a full review from the SEC of the merits of its decision to expel, or before the time period for Alpine to seek such review has elapsed.
At the same time, we assert that FINRA has failed to demonstrate that Alpine will suffer irreparable harm from participating in the expedited process, unless the SEC cannot expel Alpine until it conducts its own review. For these reasons, Alpine has not shown that it is entitled to a preliminary injunction stopping the proceedings altogether.
Because this case comes with a preliminary injunction stance, we cannot necessarily resolve the ultimate merits of any of Alpine’s constitutional issues, and our determination of Alpine’s likelihood of success on the private non-mandate issue will depend on this case. It is based only on early records of . example. We remand this to the district court to determine the ultimate merits of Alpine’s claim.
Judge Walker’s 29-page opinion, concurring in part and dissenting in part, begins as follows:
Article II of the Constitution begins, “The executive powers are vested in the President of the United States.” That is, civilians cannot exercise significant executive power. No person in the Government except the President and any officers appointed or removed under Article II may do so.
The Financial Industry Regulatory Authority is nominally a private enterprise. Investigates, prosecutes, and adjudicates violations of federal securities laws. These laws generally prohibit broker-dealers from conducting business unless they are affiliated with FINRA.
Today, the majority holds that the Constitution likely requires government review before FINRA kicks a company out of business and puts it out of business. That holding is a victory for the Constitution.
But this is only a partial victory because the problems with FINRA’s enforcement proceedings are much more serious. FINRA exercises significant administrative authority in investigating, prosecuting, and initially adjudicating charges against companies that are legally required to be subject to FINRA’s disposition. Such executive power can only be exercised by the President and his executive branch responsible to the nation.
(He is responsible).By ignoring this principle through “illegal litigation initiated by unlawful decision-makers,” FINRA imposes irreparable harm that should be prevented by this Court granting the requested preliminary injunction in its entirety.
I respectfully disagree with the majority’s decision to deny such relief.
I am confident that Alpine Securities will file a petition for certiorari. The question is whether FINRA will do the same (or file a blanket rehearing petition).
