CSG Law Alert: FINRA Picks a Curious Time to Double Down on “Regulation by Enforcement”
It has been a challenging year for FINRA.
In June, FINRA reported it had lost $22 million in fiscal year 2023 (following a $218.1 million loss in 2022) and announced its plan to raise the fees it imposes on its membership for the second time in less than five years.
In July, Project 2025, a policy initiative whose authors include a number of former Trump administration officials, called for FINRA to be abolished and folded into the SEC, stating: “FINRA [has] proved to be ineffective, costly, opaque, and largely impervious to reform.”1
In November, a Panel of the D.C. Circuit suggested that FINRA might run afoul of the private nondelegation doctrine when it seeks to enforce federal securities laws and regulations.2
In December, a Fourth Circuit Judge similarly questioned during oral argument whether FINRA’s ability to ban its members for life was “something of a government function.”3
Of course, all of this has occurred against the backdrop of an incoming presidential administration that seems particularly skeptical of securities regulation and regulators.
And yet, in a recent settlement, FINRA seemingly has decided that now is the time to push the limits of the controversial practice of “regulation by enforcement.”
In a Letter of Acceptance, Waiver, and Consent (AWC) issued on December 6, 2024, FINRA fined SG Americas Securities $950,000 for failing to fingerprint more than 2,000 individuals.
As we pointed out in a prior Client Alert, FINRA can only enforce rules, regulations, and statutes; it cannot enforce things that are not rules, regulations, and statutes—e.g., Regulatory Notices and Notices to Members. And FINRA’s By-Laws state that any determination by FINRA to discipline a member must set forth “the rule, regulation, or statutory provision” alleged to have been violated.
That brings us back to SG Americas. In the AWC, FINRA alleged that by failing to fingerprint more than 2,000 individuals, the firm violated Exchange Act Rule 17f-2. That rule requires broker-dealers to fingerprint each of its “partners, directors, officers and employees.”4 So, what is the problem? The problem here is that FINRA does not allege that any of the roughly 2,000 individuals whom SG Americas failed to fingerprint were “partners, directors, officers [or] employees” of the firm. To the contrary, FINRA explicitly states that they were not, describing them as nonregistered employees of the firm’s United States and Canadian affiliates. What statute, regulation, or rule requires a broker-dealer to fingerprint individuals who are not registered or employed by the firm but who instead work for an affiliate? FINRA does not cite any such authority.5
To summarize, FINRA fined a broker-dealer nearly $1 million for violating an obligation that does not appear in any statute, regulation, or rule in a case that doesn’t involve any allegation of customer harm or risk to the markets.6 One is left to wonder why, and perhaps even more curiously, why now?
1 “Mandate for Leadership: The Conservative Promise” at 830.
2 Alpine Securities Corp. v. Financial Industry Regulatory Authority, Inc., No. 23-5129 (D.C. Cir. Nov. 22, 2024).
3 4th Circ. Casts Doubt on Broker’s FINRA Challenge, Jessica Corso, Law360 (Dec. 10, 2024).
4 In fact, the Rule is even more narrow, as it exempts certain categories of “partners, directors, officers and employees” from the fingerprint requirement. See 17 CFR § 240.17f-2(a)(1)(i).
5 In prior settlements involving similar allegations, FINRA also cited to Article III, Section 3(b) of the FINRA By-Laws. But that provision requires only that firms not associate with statutorily disqualified persons; it does not prescribe how a firm must go about screening for statutorily disqualified persons or otherwise require (or even mention) fingerprinting, much less fingerprinting of employees of affiliates. See, e.g., Citigroup Global Markets Inc., 2017054329501 (July 2019).
6 The purpose of Rule 17f-2’s fingerprinting requirement is for broker-dealers to determine whether any of their associated persons are subject to statutory disqualification. Notably, FINRA does not allege that any of the 2,000 or so individuals that SG Americas failed to fingerprint were statutorily disqualified.