The financial industry’s self-regulator likely doesn’t have the authority to “unilaterally” expel brokerages it claims have engaged in misconduct, a federal appeals court ruled, in a case that Wall Street is watching closely.
The Financial Industry Regulatory Authority must let the U.S. Securities and Exchange Commission weigh in before it can cast out one of its members, a three-judge panel of the U.S. Court of Appeals for the District of Columbia found.
The law requires that FINRA’s regulatory role be supervised by a government actor, Circuit Judge Patricia Millett wrote in an opinion filed on Friday.
The decision calls into question the regulator’s ability to move swiftly to kick members out of FINRA in “expedited proceedings” that bypass the SEC.
The case threatens to upend a self-regulatory model used by resource-constrained federal watchdogs in which they turn to industry-backed agencies.
The case centers on FINRA's attempt to ban Alpine Securities Corp. from the brokerage industry after finding that it misused client funds and increased customer fees without proper notice, allegations the brokerage denies.
Brian Barnes, Alpine’s attorney, has called FINRA an “unaccountable enforcer of federal law” that acts like a government agency but without the constitutional boundaries.
FINRA, known for its role in monitoring misconduct of firms and individual brokers, has contended that it operates with adequate supervision from the SEC.
Must Halt Expulsion
The appellate panel decided that Finra must halt its expulsion of Alpine until the SEC reviews the case, but can continue with its proceeding against the company.
The judges said they would leave it to the lower court to determine the merits of Alpine’s constitutional challenges.
