D.C. Circuit Enjoins FINRA from Expelling Member Before SEC Review – Sidley Austin

On November 22, 2024, the U.S. Court of Appeals for the D.C. Circuit made a significant decision in Alpine Securities Corporation v. FINRA, which raised concerns about the structure of the Financial Industry Regulatory Authority. The court ruled in Alpine’s favor, preventing any expulsion before the Securities and Exchange Commission (SEC) reviews the case. This decision, while addressing a specific issue, also opens up opportunities for future challenges to FINRA.

Here’s a bit of background: FINRA is a private corporation registered with the SEC, mandated by Congress as the sole organization for securities traders in the U.S. Alpine, a broker-dealer, faced expulsion from FINRA following a violation. In response, Alpine contended that FINRA had been given too much authority or, alternatively, that FINRA’s actions infringed upon the Constitution.

The D.C. Circuit’s opinion reversed part of the district court’s decision, preventing Alpine’s expulsion until after the SEC’s review. The court supported Alpine’s argument that FINRA’s ability to expel without SEC oversight violates rules against delegating governmental powers. However, the court rejected other claims from Alpine, such as an Appointments Clause challenge.

The court’s ruling emphasizes the importance of SEC review in cases involving expedited expulsions from FINRA, which can have immediate and severe consequences. While the ruling does not question the enforcement of sanctions after SEC review, it does raise questions about the mechanisms of expelling a member from the securities industry without proper government oversight initially.

The decision offers insights into the limitations and possibilities for future legal challenges against FINRA. It highlights the significance of regulatory authority, the importance of due process, and the potential implications for members of the securities industry. This ruling may pave the way for more robust oversight and accountability within the financial regulatory landscape.