DOJ and FINRA Urge Supreme Court to Reject Challenge to FINRA's Authority

In opposing a petition before the US Supreme Court, the Justice Department and FINRA defended the constitutionality of the self-regulatory organization's ("SRO") enforcement powers. The opponents argued that the SRO operates as a private entity subject to extensive SEC oversight, and does not violate constitutional separation of powers.

The case involves a registered broker-dealer that challenged FINRA disciplinary actions which were imposed for violating a cease-and-desist order regarding the charging of excessive fees. In an expedited proceeding, FINRA sought the firm's immediate expulsion from membership, a sanction that would prevent the firm from continuing in business. The firm filed suit, arguing that FINRA's enforcement structure was unconstitutional because: (i) FINRA acts as a private actor wielding regulatory power without presidential supervision, violating Article II; (ii) FINRA's hearing officers exercise significant federal authority but are not appointed in compliance with the Appointments Clause; and (iii) FINRA's ability to expel members without SEC review violates the "private non-delegation doctrine." (See previous coverage.) 

The US Court of Appeals for the DC Circuit ruled that FINRA cannot enforce an expulsion order against the firm before the SEC reviews it. However, the Court rejected the firm's broader claim that merely participating in an expedited proceeding constitutes irreparable harm. The Appellate Court distinguished the firm's claims from the Supreme Court's holding in Axon v. FTC, which recognized a "here-and-now" constitutional injury in enforcement proceedings by governmental agencies.

In its opposition to Supreme Court review, the United States argued that Axon "did not speak to what constitutes irreparable harm for purposes of the extraordinary remedy of a preliminary injunction" and emphasized that constitutional challenges must still satisfy traditional equitable standards for injunctive relief. The government also noted that every appellate court to address the question has held that participation in administrative proceedings—even those alleged to be unconstitutional—does not automatically establish irreparable harm.

FINRA, in a separate brief, argued that its structure reflects a "centuries-old tradition of securities self-regulation" and that the Exchange Act expressly envisions private regulatory bodies operating under SEC supervision. FINRA emphasized that it is a "private, not-for-profit Delaware corporation," that it "receives no funding from" the government, and that its rules and disciplinary actions are subject to plenary SEC review.

Both the United States and FINRA urged the Court to deny certiorari, citing (i) the case's interlocutory posture; (ii) the lack of a circuit split; and (iii) the firm's forfeiture of key arguments in the lower courts.