The Financial Industry Regulatory Authority (FINRA) is currently embroiled in a significant legal dispute that has the potential to redefine the self-regulatory framework that underpins its operational model—a model that has been a cornerstone of brokerage oversight for many years. This high-profile case has garnered enough momentum that it could ascend to the United States Supreme Court.
FINRA has submitted an appellate brief requesting the reversal of an injunction previously awarded in July to Alpine Securities Corporation, a Utah-based broker-dealer. The injunction was granted to prevent FINRA from expelling Alpine from the brokerage industry.
Alpine's legal argument challenges the constitutionality of FINRA's enforcement process. It asserts that FINRA's administrative judges are not in compliance with federal appointment regulations and that FINRA's status as a private self-regulatory organization (SRO) disqualifies it from executing federal securities law enforcement.
The implications of this case are profound. FINRA contends that a decision in Alpine's favor could fundamentally disrupt the longstanding SRO model, extending beyond the financial services industry to affect any sector where private parties are delegated enforcement responsibilities.
"Alpine’s contentions, if upheld, could gut a self-regulatory system that has effectively served the investment community for generations. This could lead to the replacement of private regulation with federal oversight and impose governmental official status on leaders across significant sectors of the private economy," FINRA stated, urging the court to consider the grave repercussions of endorsing such arguments.
Maranda Fritz, Alpine's attorney, rebuts this, suggesting Alpine is simply holding FINRA to essential constitutional principles that guarantee due process among other protections. She questions FINRA’s assertion that adherence to constitutional standards would be so burdensome, asking what constitutional mandates FINRA believes it cannot fulfill.
FINRA has refrained from commenting beyond its formal statement and legal submissions. The case originated from a comprehensive investigation into Alpine for alleged misappropriation of client funds, unauthorized trades, and unfair pricing.
FINRA's probe highlighted that Alpine, one of the largest clearing firms in 2018, implemented significant business model changes during a financial downturn, including a shift away from retail clients, accompanied by exorbitant fees for those retaining their accounts.
In March last year, a FINRA panel ruled against Alpine, asserting excessive fees and unauthorized client asset transfers, imposing $2.3 million in restitution and expelling Alpine from the industry. Court filings reveal FINRA's claim that Alpine contravened an initial cease-and-desist order over 35,000 times, allegedly diverting over $54 million from clients.
Fritz argues against the enormity of these claimed violations, labeling FINRA as an overzealous regulator and contending that the vague “obey-the-law” stipulations of the order are not enforceable outside of FINRA's realm.
The ensuing legal saga reached the U.S. District Court for the D.C. District, where Alpine’s request for an injunction against FINRA's expulsion order was dismissed. However, the appellate court in D.C. favored Alpine in a 2-1 decision, stirring the legal community.
Judge Justin Walker’s concurring opinion highlighted the serious constitutional questions posed by FINRA’s administrative practices and the severe repercussions of industry expulsion without a proper hearing.
This case echoes the Supreme Court's decision in Lucia vs. SEC regarding the constitutionality of the SEC's use of administrative law judges, which Alpine cites comparably, advocating for constitutional compliance by FINRA as it exercises considerable regulatory power.
FINRA defends its practices by referencing historical precedent for delegating specific duties to private entities, a practice sanctioned by laws and upheld by the judiciary. FINRA also maintains that it operates under the vigilant oversight of the SEC, especially in enforcement and rule-making. The organization argues that as a private entity, it is exempt from the constitutional appointment requirements that apply to government officials.
The Justice Department has sided with FINRA, and various industry groups, including the NYSE and Nasdaq, have submitted amicus briefs in support. Meanwhile, amicus briefs backing Alpine have been filed by organizations advocating against excessive governmental regulation.
With further amicus submissions expected and oral arguments yet to be scheduled, the trajectory of this case is keenly observed by the industry. Should Alpine emerge victorious in the appellate court, it is anticipated that FINRA would escalate the matter, either en banc with the circuit court or to the Supreme Court. Conversely, Alpine has indicated an intention to appeal should the decision favor FINRA.
