Former Trump Attorney General joins broker-dealer’s battle against Biden’s Justice Department.
The Financial Industry Regulatory Authority Inc. (FINRA) is facing a significant challenge in a federal appeals court in Washington, D.C.
This challenge has the potential to seriously impact FINRA’s existence and operations.
The FINRA case raises constitutional concerns. William Barr and Noel Francisco advocate for changes opposing the Biden administration’s stance.
A Case of Constitutional Dispute: Alpine Securities vs. FINRA
The dispute centers on Alpine Securities Corp, a Salt Lake City broker-dealer. Alpine argues Constitution rules should apply to government, not private entities like FINRA. The case has broad implications and began with Alpine trying to halt a FINRA hearing.
The hearing sought to remove Alpine and charge it $2.3 million for allegedly overpaid fees. These violations were deemed severe by FINRA.
Alpine’s Constitutional Challenge Against FINRA: Key Arguments
The Justice Department labeled Alpine as a broker-dealer with a history of rule violations according to FINRA, including thousands in the past year. Alpine filed a lawsuit to stop a FINRA hearing and questioned FINRA’s constitutional structure. Alpine’s primary arguments are twofold. First, it claims that FINRA hearing officers, despite having the authority to enforce securities laws, act as government agents.
However, they’re private employees without presidential oversight, violating the Appointments Clause. Second, Alpine argues that even if FINRA isn’t a government entity, its enforcement breaches the nondelegation doctrine, as the SEC’s oversight isn’t sufficient.
Despite Alpine’s arguments, U.S. District Judge Beryl Howell dismissed them in June. Howell ruled that FINRA isn’t a state actor and is considered a private self-regulatory organization. She also noted that the nondelegation doctrine doesn’t apply, given the SEC’s control over FINRA.
Alpine’s Victory in D.C. Circuit and Ongoing Legal Battle Against FINRA
Alpine took its case to the D.C. Circuit, seeking an emergency injunction to stop FINRA’s expedited proceedings. Both FINRA, represented by Gibson Dunn & Crutcher, and the Justice Department urged the circuit court judges to deny the injunction. The Justice Department, which intervened in the case to defend FINRA, argued that Alpine’s contentions go against the SEC’s oversight of FINRA.
The Justice Department stated that “FINRA is a private, self-regulatory organization whose front-line supervision of its own members is subject to plenary SEC oversight and review. It is thus not a state actor.”
In a surprising twist, a divided three-judge D.C. Circuit panel granted Alpine’s motion in July. In a concurring opinion, Judge Justin Walker, appointed to the appeals court in 2020, suggested that FINRA hearing officers appear to exercise authority similar to SEC administrative law judges. According to recent U.S. Supreme Court precedent, such judges are subject to the Appointments Clause.
Walker wrote that this could be a constitutional problem, as FINRA hearing officers don’t appear to act under the President.
In response, FINRA asked the entire D.C. Circuit to reconsider the panel’s decision, warning that the injunction could disrupt FINRA’s enforcement efforts. Over several decades, FINRA argued, other appellate courts consistently rejected challenges to its role, recognizing it as a congressionally authorized private self-regulator operating under the SEC’s ultimate control.
Last month, the appeals court denied FINRA’s motion, allowing Alpine to submit its opening brief on the merits.
Support for Alpine and Criticism of FINRA’s Enforcement Practices
This development led to two additional briefs supporting Alpine, one from the New Civil Liberties Alliance, a nonprofit often representing defendants in SEC actions, and another from Barr, now at Torridon Law, and Francisco, a partner at Jones Day. They filed on behalf of the American Free Enterprise Chamber of Commerce, a recently established group aiming to counter what it sees as excessive federal regulatory expansion that stifles American businesses.
These supporting parties argued that FINRA investigates, prosecutes, and punishes numerous securities brokers and firms each year, imposing substantial fines based on alleged violations of federal securities laws and rules. Yet, they claimed that the SEC reviews only a small number of these cases, often years later, after the damage is already done and irreparable, which they argue the Constitution forbids.
Barr and Francisco Argue Against FINRA’s Authority
Barr and Francisco presented arguments aligning with Alpine’s position, contending that FINRA hearing officers qualify as state actors who are unconstitutionally appointed and shielded from removal. Alternatively, they argued that FINRA unconstitutionally exercises executive-branch power without adequate government oversight. They asserted that such an arrangement cannot be tolerated under the Constitution.
Important:Â Please note that this article is only meant to provide information and should not be taken as legal, tax, investment, financial, or any other type of advice.
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