Supreme Court Declines to Hear Challenge to FINRA Powers

The US Supreme Court declined to hear a constitutional challenge to FINRA's disciplinary process brought by Alpine Securities Corp., a broker-dealer facing expulsion. The decision leaves in place a DC Circuit ruling that bars FINRA from enforcing expulsions without prior SEC review. In response, FINRA proposed rule changes to delay the effectiveness of severe sanctions until SEC review is completed or waived.

As previously covered, the case arose when a broker-dealer challenged FINRA's disciplinary authority after the SRO sought its immediate expulsion for violating a cease-and-desist order tied to excessive fees. The firm claimed FINRA's enforcement structure is unconstitutional on three grounds: (i) it exercises regulatory power without presidential oversight; (ii) uses improperly appointed hearing officers; and (iii) can expel members without SEC review. The DC Circuit held that FINRA cannot enforce an expulsion without prior SEC review but rejected the firm's claim that merely undergoing the proceeding caused irreparable harm.

Opposing Supreme Court review, the DOJ and FINRA urged the Court to deny certiorari, citing the case's procedural posture, absence of a circuit split and the firm's failure to preserve arguments.

In the wake of the Alpine litigation, FINRA proposed amendments which would delay the effectiveness of sanctions (such as expulsions, cancellations of membership and denials of continued membership) until a firm has had the chance to apply for SEC review and that review has either lapsed or concluded. FINRA stated that any investor protection concerns arising from aligning its rules with the Alpine decision could be mitigated through existing safeguards. FINRA will:

• seek prompt SEC resolution when an expulsion or membership denial is appealed;

• impose interim measures to protect customers during appeals, including conditions or restrictions under Rule 9285 to prevent further misconduct; and

• maintain these restrictions until all appeals, including to the SEC, are exhausted.

FINRA also proposed to stay the effectiveness of other FINRA actions against member firms that may result in a sanction or action that shares the relevant characteristics of the sanction at issue in Alpine.

FINRA filed for immediate effectiveness and requested that the SEC waive the 30-day operative delay.