The U.S. Supreme Court has opted not to hear Alpine Securities’ case arguing that the Financial Industry Regulatory Authority (Finra), the brokerage industry’s self-regulatory body, is unconstitutional.
This decision preserves the status quo for Finra’s authority and has broader implications for RIAs and other regulated entities watching the evolving landscape of self-regulation.
Case Overview and Key Allegations
The dispute traces back to Finra's 2019 allegations against Utah-based broker-dealer Alpine Securities. Finra accused the firm of charging excessive fees, misusing client funds, and conducting unauthorized trading. Following these accusations, Finra obtained a cease-and-desist order and later claimed Alpine violated it over 35,000 times, alleging the firm misappropriated more than $54 million from clients. In 2022, Finra expelled Alpine from the industry through an expedited process, bypassing a review by the Securities and Exchange Commission (SEC).
Alpine’s subsequent lawsuit sought not only to challenge its expulsion but also to argue that Finra, as a private organization, lacked constitutional authority under the nondelegation doctrine, which limits the powers Congress can transfer to nongovernmental entities.
Supreme Court’s Decision and Its Implications
By declining to hear the case, the Supreme Court has effectively ended the immediate constitutional challenge to Finra. However, Alpine's legal battle isn’t over. The firm plans to continue its challenge in federal court, with a case scheduled to proceed in the D.C. District.
Legal experts note that the Court’s decision leaves unresolved questions about Finra’s role as a self-regulatory organization. A prior ruling by the U.S. Circuit Court granted Alpine the right to an SEC review of its expulsion, a limited victory that sidestepped the broader constitutional issues. Finra CEO Robert Cook expressed confidence that the organization would prevail on those larger questions, emphasizing Finra’s adherence to legal precedent and its government-deputized role.
Broader Legal and Legislative Challenges
Finra faces additional scrutiny beyond the Alpine case. Conservative critics and some lawmakers have raised concerns about its structure and authority. For instance:
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Legislative Proposals: Rep. Lisa McClain (R-MI) introduced a bill in April proposing to transfer Finra’s examination, enforcement, and rule-making functions to the SEC. While the bill hasn’t gained traction, it highlights ongoing debates about Finra’s oversight role.
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Project 2025: A policy proposal associated with a conservative think tank outlines plans to dismantle Finra if implemented under a future administration, underscoring ideological opposition to self-regulatory frameworks.
Despite these challenges, Finra retains strong institutional support. In the Alpine case, the Justice Department advocated for Finra’s constitutional legitimacy, citing extensive legal precedent.
What’s Next for Alpine and Finra?
Alpine’s attorney, Maranda Fritz, characterized the Supreme Court’s denial as a procedural setback rather than a substantive defeat. She explained that the appeal was intended to expedite the case, and the firm is now preparing to address its claims through traditional litigation in lower courts. According to Fritz, this marks the beginning of a more detailed examination of Finra’s constitutional framework.
For Finra, the organization appears to welcome the Supreme Court’s decision, stating it is “pleased” the case did not meet the Court’s criteria for review. This outcome allows Finra to maintain its current regulatory operations without immediate disruption.
Considerations for RIAs
While the Alpine case focuses on broker-dealers, the implications extend to RIAs and other entities operating within self-regulatory structures. Key takeaways include:
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Regulatory Stability: The Supreme Court’s decision reinforces Finra’s role in maintaining market integrity, at least in the near term. RIAs should continue monitoring how self-regulatory bodies like Finra adapt to legal and political challenges.
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Potential Shifts in Oversight: Legislative efforts, such as Rep. McClain’s bill, could eventually alter the balance of power between Finra and the SEC. RIAs should remain vigilant about potential changes that could impact compliance obligations.
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Broader Trends: The nondelegation doctrine and constitutional scrutiny of private regulators may shape future cases, influencing not only Finra but also other self-regulatory organizations that oversee parts of the financial industry.
Conclusion
For now, Finra’s authority remains intact, and the Alpine case will proceed in federal court. However, the regulatory environment is far from static. RIAs and wealth advisors should stay informed about developments that could reshape the landscape of financial regulation, potentially affecting the interplay between self-regulatory bodies and government oversight.
