D.C. Circuit Questions Constitutionality of FINRA Hearing Officers, Enjoins Disciplinary Proceeding

On July 5, 2023, the D.C. Circuit Court of Appeals handed down an emergency order that could throw a major obstacle in front of the Financial Industry Regulatory Authority (FINRA) regulatory program. The decision enjoins FINRA from expelling Alpine Securities Corporation (Alpine) through its expedited hearing process due to constitutional issues pending appeal. The court agreed that Alpine was likely to win on the merits in its argument that FINRA hearing officers are acting with executive authority without being properly appointed officers of the executive branch in violation of the Constitution.

The Alpine case draws upon principles established by the U.S. Supreme Court in Lucia v. SEC, which held that administrative law judges (ALJs) within the Securities and Exchange Commission (SEC) were Officers of the United States who must be appointed in accordance with the Appointments Clause of the Constitution. Although far from over, the Alpine case calls into question the constitutionality of FINRA’s hearing officers and may have significant implications for the self-regulator.

Background

Alpine is a securities broker registered with FINRA. In early 2023, FINRA brought an expedited enforcement action to stop Alpine from selling securities due to alleged violations of a preexisting cease-and-desist order. In response, Alpine filed an emergency motion seeking an injunction pending appeal to block its expulsion from FINRA, arguing that FINRA’s action violates the Constitution because FINRA hearing officers impermissibly wield executive power that may be exercised only by the U.S. President and officers under his supervision.

D.C. Circuit Ruling

The court granted Alpine’s emergency injunctive motion, finding that Alpine met the “stringent requirements” for an injunction pending appeal, including showing likelihood of success on the merits. Notably, given the procedural posture, the constitutional issues were not ultimately decided but will be subject to further briefing and argument in the matter.

Nonetheless, in a concurring opinion, Circuit Judge Justin Walker relied on principles established by the Supreme Court in Lucia in analyzing the constitutionality of FINRA hearing officers. In Lucia, the Supreme Court reasoned that ALJs “exercised significant authority” because they had discretion to exercise an important government function of enforcing the nation’s securities laws, including by exercising authority akin to a federal district judge such as, among other things, demanding testimony, ruling on motions, and regulating hearings. Accordingly, ALJs were officers of the United States, subject to the Appointments Clause of the Constitution.

Judge Walker reasoned that FINRA hearing officers, who “enforce securities laws and decide parties’ rights,” are “near carbon copies” of ALJs, and “if the ALJs in Lucia exercised ‘significant’ executive power, then FINRA hearing officers probably do too.” In particular, Judge Walker identified two constitutional issues: (1) that FINRA hearing officers are not appointed by a government body pursuant to the Appointments Clause, and (2) the inability of the SEC to remove FINRA hearings officers, who remain private employees, except for cause, which he reasoned may infringe on the President’s ability to hold his subordinates accountable.

Implications

So far, FINRA has not publicly expressed its view on Alpine, and the implications are far from clear.

If Alpine ultimately prevails, the implications could be far broader for FINRA than the current fight over the constitutionality of the SEC administrative proceeding process. Such a ruling could also affect the regulatory programs of other self-regulatory organizations with analogous programs. However, this order addresses only an emergency injunction, not the merits, which will be addressed after further briefing and argument. Moreover, if Alpine ultimately prevails at the D.C. Circuit, the case would likely be appealed to the Supreme Court.

It remains to be seen how the order may affect FINRA’s current program while the case is pending. Given the potential significance of the ruling, FINRA is no doubt itself considering implications and next steps. At minimum, regulated entities should closely monitor FINRA for its response, and parties to FINRA enforcement matters should also consider implications for their defense strategies.

More broadly, the D.C. Circuit’s order fits into a larger, ongoing pattern in which courts are questioning the authority of regulators to bring securities enforcement actions through venues other than federal court. The Supreme Court, in Axon Enterprise, Inc. v. FTC, 143 S. Ct. 890 (2023), held in April that respondents in SEC administrative proceedings could bring separate actions in federal court to enjoin administrative proceedings where they implicated core constitutional issues. And the Supreme Court just granted certiorari in Jarkesy v. SEC, 34 F.4th 446 (5th Cir. 2022), to hear several challenges to SEC administrative proceedings next term. All of this spells continued uncertainty concerning a central procedural aspect of securities enforcement and regulation.

¹ Alpine Securities Corp. v. Financial Industry Regulatory Authority, No. 1:23-cv-01506-BAH (D.C. Cir. Jul. 5, 2023) (available here). Scottsdale Capital Advisors Corporation, a broker-dealer registered with FINRA, joined Alpine in the initial complaint against FINRA, but Alpine filed an appeal from the D.C. District Court order in the matter.