CSG Law Alert: Is a Significant Threat to FINRA’s Authority Lurking in the Text of the Alpine Decision?
On November 22, the D.C. Circuit issued its highly anticipated decision in Alpine v. FINRA.1 Although the Court enjoined FINRA from unilaterally expelling Alpine following an expedited proceeding, one could imagine FINRA’s leadership thinking, “it could have been worse.” Indeed, it could have been worse for FINRA. The Court did not go as far as it could have—or as far as the dissent would have—in restricting FINRA’s enforcement authority. Upon closer inspection, however, it might be too soon for FINRA to breathe a sigh of relief.
The majority adopts a narrow interpretation of the private nondelegation doctrine.
The majority held that FINRA’s attempt to expel Alpine without an opportunity for SEC review likely violated the private nondelegation doctrine. Simply put, the private nondelegation doctrine provides that the powers the Constitution vests in the federal government cannot be delegated outside the government. Here, the majority adopted a narrow interpretation of the private nondelegation doctrine, holding that FINRA likely violated the doctrine only to the extent that it sought to expel Alpine without an opportunity for SEC review: “our opinion is limited to expulsion orders in expedited proceedings.”2
The dissent calls for a broader application of the private nondelegation doctrine.
The dissent argued for a broader interpretation of the private nondelegation doctrine. According to the dissent, Article II of the Constitution, which provides that “executive Power shall be vested in a President of the United States of America,” means that a private citizen cannot wield “significant executive authority.”3 Therefore, because FINRA is (ostensibly) a private entity, it cannot exercise executive powers reserved for the executive branch, such as the power to investigate, prosecute, and adjudicate violations of federal securities laws. The dissent explained:
FINRA wields significant executive authority when it investigates, prosecutes, and initially adjudicates allegations against a company required by law to put itself at FINRA’s mercy. That type of executive power can be exercised only by the President . . .4
The majority rejects the dissent’s call for a broader application of the private nondelegation doctrine because, in this case, FINRA did not charge a violation of a federal law or regulation.
In rejecting the dissent’s call for a broader application of the private nondelegation doctrine, the majority emphasized that in this case FINRA sought only to enforce its own rules, not federal securities laws or regulations:
The dissenting opinion favors a broader injunction that would prevent FINRA from policing its member’s misconduct at all. In doing so, the dissenting opinion goes far beyond even Alpine’s nondelegation arguments. Remember that FINRA is not enforcing any federal law or SEC regulation against Alpine in the underlying proceeding.5
Throughout its opinion the majority repeatedly emphasized this point:
- “FINRA’s findings involved violations only of FINRA’s own internal rules; FINRA did not find that Alpine had violated federal securities laws or regulations.”6
- “The complaint alleged only violations of internal FINRA rules; it did not allege any violations of federal securities laws or regulations.”7
- “To start, remember that, in this case, FINRA is not alleging or seeking to enforce any federal law or regulation. Its complaint . . . rested solely on findings of non-compliance with FINRA’s internal rules.”8
Why is this significant?
If, as the majority seems to imply, FINRA violates the private nondelegation doctrine when it seeks to enforce federal securities laws or regulations, then FINRA violates this doctrine on a daily basis. Every day, FINRA examiners investigate potential violations of federal securities laws and regulations and FINRA’s Enforcement Department routinely prosecutes these violations. And as the dissent points out, FINRA does so unilaterally, without any contemporaneous (or sometimes any at all) oversight by the SEC.
The “most obnoxious form” of delegation
Though delegation may come in many forms—e.g., delegation of legislative power to the executive branch—the Supreme Court has described the delegation of executive power to a private entity as “the most obnoxious form” of delegation because it permits the government to circumvent the Constitution.9 As the dissent explained:
If the vast powers of the federal government could be exercised outside the constitutional system, the government would be ‘able to evade the most solemn obligations imposed in the Constitution by simply resorting to the corporate form.’10
That is exactly the danger here.
Consider the following hypothetical: Two brokers, Broker A and Broker B, are alleged to have violated the same federal securities law. The SEC investigates Broker A, while FINRA investigates Broker B.
Because Broker A is investigated by the SEC, an arm of the executive branch, Broker A is entitled to the full panoply of Constitutional protections. Broker A cannot be compelled to incriminate himself. Broker A is entitled to a trial by jury and all of the due process protections that come with a federal jury trial, including the right to fulsome discovery. And, importantly, under the Supreme Court’s decision in Loper Bright, if the law is ambiguous, the federal court need not defer to the SEC’s interpretation.
Because Broker B is investigated by FINRA, a private entity, Broker B gets none of these protections. He cannot assert his right under the Fifth Amendment not to incriminate himself. If he does, he no doubt will be permanently barred from the securities industry by FINRA for violating FINRA Rule 8210. He has no right to a jury trial. Instead, his case will be heard by a hearing officer employed by FINRA itself. He has no right to due process and only a limited right to discovery. And the FINRA hearing panel may defer to the SEC’s interpretation of the law.11
Even more troubling is that the SEC can, and often does, refer matters that it could bring itself to FINRA. In other words, there is nothing preventing the SEC from prosecuting Broker A but referring Broker B’s case to FINRA, or vice versa, in effect permitting the SEC to pick and choose when it will “evade the most solemn obligations imposed in the Constitution.”12
Conclusion
On its face, the Court’s decision in Alpine v. FINRA might seem like a win for FINRA. If, however, as the majority signaled, it would have reached a different conclusion had FINRA charged Alpine with violating a federal securities law or regulation, then the Court’s decision opens up the possibility that FINRA violates the private nondelegation doctrine when it examines for and prosecutes violations of federal securities laws and rules and that it cannot continue to do so.
1 Alpine Securities Corp. v. Financial Industry Regulatory Authority, No. 23-5129, 2024 WL 4863140 (D.C. Cir. Nov. 22, 2024).
2 Id. at *11.
3 Id. at *17.
4 Id.
5 Id. at *9 (emphasis added).
6 Id. at *4.
7 Id. at *5.
8 Id. at *9.
9 Carter v. Carter Coal Co., 298 U.S. 238, 311 (1936).
10 Alpine Sec. Corp., 2024 WL 4863140, at *22 (quoting Lebron v. National Railroad Passenger Corp., 513 U.S. 374, 397 (1995).
11 Indeed, one wonders whether it is even fair to expect a FINRA hearing panel not to defer to the SEC’s interpretation of a federal securities law when FINRA’s Office of Hearing Officers, like the rest of FINRA, is supervised by, and accountable to, the SEC.
12 In a development that will be closely watched by FINRA and FINRA practitioners, on the same day that the D.C. Circuit issued its decision in Alpine, the Supreme Court agreed to hear a case raising similar private nondelegation claims. See Federal Communications Commission v. Consumers’ Research, 2024 WL 4864036 (Nov. 22, 2024).