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

On November 22, 2024, the U.S. Court of Appeals for the D.C. Circuit issued its long-awaited decision in Alpine Securities Corporation v. FINRA, a case that raised questions about the constitutionality of the regulatory structure of the Financial Industry Regulatory Authority.¹ Although the panel split 2–1 on FINRA’s broader regulatory authority, the court unanimously issued a narrow ruling in Alpine’s favor enjoining any expulsion before Securities and Exchange Commission review. The panel majority did not rule on the merits of Alpine’s Appointments Clause challenge to FINRA’s regulatory authority. While FINRA may take some comfort in the narrowness of the court’s ruling, the decision nonetheless recognizes the viability of legal theories, such as the private nondelegation doctrine, that create some jeopardy for FINRA — suggesting potential avenues of attack for litigants in future FINRA cases.

Background

FINRA is registered with the SEC as a registered securities association under the Securities Exchange Act of 1934. It is organized as a private corporation and receives no government funding. However, Congress has made it mandatory for securities traders to join a registered securities association in the United States — and FINRA is the only such organization.

Alpine is a broker-dealer registered with FINRA. In early 2023, after Alpine’s alleged violation of a preexisting cease and-desist order, FINRA initiated expedited proceedings to expel Alpine from FINRA membership. In response, Alpine sought a preliminary injunction in federal district court to block its potential expulsion. Alpine raised two alternative arguments. First, it argued that if FINRA is viewed as a private entity, the federal government has delegated too much authority to FINRA in violation of the private nondelegation doctrine.² Second, Alpine argued that if FINRA is viewed as a governmental entity, FINRA’s expedited proceedings violate the Appointments Clause of the Constitution.³

After the district court denied the injunction, Alpine appealed to the D.C. Circuit.

D.C. Circuit Opinion

Overview. The D.C. Circuit reversed in part and remanded the case for the district court to enter a limited injunction barring FINRA from giving effect to any order expelling Alpine from FINRA until after the SEC reviews the expulsion order. On that issue, the court found that Alpine had demonstrated a likelihood of success on the merits of its argument that FINRA’s ability to “unilaterally expel a member, and in so doing, bar the expelled entity from engaging in stock trading” without prior review by the SEC violates the private nondelegation doctrine.⁴ But the panel majority rejected Alpine’s request for a broader injunction against FINRA’s expedited hearing in its entirety, and it also rejected Alpine’s Appointments Clause challenge, reasoning that Alpine did not meet the standard to obtain a preliminary injunction because Alpine would not suffer an irreparable injury if FINRA’s hearing officers are not appointed in conformance with the Appointments Clause.

Private Nondelegation Doctrine. The D.C. Circuit first evaluated Alpine’s claim that FINRA’s regulatory authority violated the private nondelegation doctrine, finding that this argument was likely to succeed on the merits. The private nondelegation doctrine prohibits the delegation of governmental authority to a private entity when an accountable governmental agency does not retain the ultimate authority to approve, disapprove, or modify the private entity’s actions.⁵ The court indicated that federal securities laws delegate substantial regulatory authority to FINRA because virtually all firms and individuals that trade securities are required to join FINRA. Therefore, expulsion from FINRA amounts to expulsion from the securities industry itself.

While most FINRA decisions are subject to SEC review, expulsion from FINRA membership resulting from an expedited proceeding — such as the proceeding against Alpine — takes effect immediately. Although firms may seek SEC review of the expulsion decision, the court found that review “will almost always be too little too late.”⁶ As a practical matter, SEC review may occur weeks or months after the sanction has taken effect, during which time the expelled member has already been forced out of business. Accepting without evaluation that FINRA is a private entity, the court found that allowing FINRA to expel a member from the securities industry without an opportunity for government review prior to the sanction’s taking effect likely violates the private nondelegation doctrine.

Limited Nature of Ruling. The court was careful to note that its ruling was limited to expedited expulsions against member firms, which impose severe consequences prior to the opportunity for SEC review. The court added that nothing prevents FINRA from modifying future expedited proceedings to allow for SEC review before enforcing the expulsion, highlighting that “nothing in our opinion questions the constitutionality of enforcing an expulsion order, or any other sanction, after the SEC has affirmed it.”⁷

Appointments Clause Claim. Turning to Alpine’s Appointments Clause argument, the majority concluded that Alpine could not demonstrate that it would suffer irreparable harm from an Appointments Clause violation merely by participating in the expedited proceeding, particularly given that the court was enjoining FINRA from expelling Alpine as a result of any such proceeding before the SEC reviewed FINRA’s decision. Resolving the argument in that manner meant the majority did not need to decide the merits of Alpine’s Appointments Clause claim.

Partial Dissent by Judge Walker. Circuit Judge Justin Walker filed an opinion concurring in the judgment in part and dissenting in part, stating that he would have gone further than the majority and enjoined FINRA’s expedited proceeding in its entirety. In reaching that conclusion, Judge Walker explained that he viewed FINRA’s general approach to investigations and enforcement actions as broadly violating the private nondelegation doctrine. He also disagreed with the majority’s holding that Alpine had not established irreparable harm in its Appointments Clause challenge. Judge Walker therefore reached the merits of that argument and concluded that FINRA hearing officers are akin to SEC administrative law judges and, like them, must be appointed pursuant to the Appointments Clause.

Key Questions Following the Alpine Decision

The Alpine litigation has raised numerous fundamental challenges to FINRA’s ability to enforce its rules and other parts of federal securities laws, at least under its current structure. The D.C. Circuit’s decision provides a narrow answer to one of them and even then only in a preliminary way. As a result, further litigation on these issues is inevitable. There are several important questions that courts will need to grapple with in future cases.

1. Will future courts view FINRA’s delegated authority as narrowly as the panel majority did here? While the D.C. Circuit’s decision is narrow, it does confirm that private nondelegation is a viable argument against FINRA’s regulatory authority. There are several potential areas for future development on this front. In particular:

a. The court did not analyze the differences between securities exchanges and registered securities associations, but could those differences affect analysis of the private nondelegation issue?

b. The court mentioned but did not engage with the 1975 and 1983 amendments to the Securities Exchange Act of 1934, but could those amendments be significant to future challenges?

c. The court repeatedly emphasized that FINRA’s proceeding against Alpine involved only “internal FINRA Rules,” but what is the relevance of SEC approval of FINRA rules or the SEC’s ability to enforce FINRA rules?

2. Could future decisions apply the Appointments Clause to FINRA, even though it is at least nominally a private entity? The panel majority did not reach the Appointments Clause issue, but Judge Walker reasoned in his dissent that FINRA’s hearing officers are “nearly identical” to the SEC’s administrative law judges and thus subject to those constitutional limits.

3. How broadly will other courts construe Axon Enterprises v. Federal Trade Commission, 598 U.S. 175 (2023), in challenges to FINRA? The majority and the dissent disagreed on the proper reading and application of the recent Supreme Court decision in Axon, which concerned whether parties to an administrative proceeding before a governmental agency had to go through the proceeding before challenging the proceeding’s constitutionality in court. In Alpine, the majority construed Axon narrowly, while Judge Walker took a broader reading.

4. Will courts apply Jarkesy to FINRA enforcement proceedings and find that FINRA members have a right to a jury trial? Alpine did not press any claims under the Supreme Court’s decision last term in Securities and Exchange Commission v. Jarkesy, 144 S. Ct. 2117 (2024), and the D.C. Circuit expressly did not address whether Alpine may have a Seventh Amendment right to a jury trial in a FINRA proceeding.⁸ The application of Jarkesy to FINRA proceedings is currently at issue in at least one other pending case.⁹

5. How will courts rule on similar challenges to FINRA proceedings involving individuals rather than firms? A footnote in the majority opinion notes that FINRA sometimes bars individuals from associating with a FINRA member, which “may be meaningfully different from expulsion of a FINRA member firm since a person barred from trading securities can pursue other work while appealing to the SEC, while a firm organized for the purpose of trading securities cannot.”¹⁰

Conclusion

The Alpine decision is the latest in a line of cases questioning the limits of regulators’ authority, and several other cases involving self-regulatory organizations are pending in the courts.¹¹ With the incoming Trump administration focused on paring down both the federal government and related regulatory frameworks, we expect FINRA and other regulators will continue to face challenges to their authority in the coming years.

¹ Alpine Securities Corp. v. Financial Industry Regulatory Authority, No. 23-5129 (D.C. Cir. Nov. 22, 2024) (available here).

² The private nondelegation doctrine requires the government to supervise any private entity to which it delegates a regulatory role. The government must maintain “ultimate authority to approve, disapprove, or modify the private entity’s actions and decisions on delegated matters.” Id. at 17 (cleaned up).

³ “The Appointments Clause prescribes the exclusive means of appointing” federal officers. Lucia v. Securities and Exchange Commission, 585 U.S. 237, 244 (2018). The clause commands that federal officers must be placed into office in specific ways (e.g., through presidential nomination and Senate confirmation), in part to ensure that those who wield significant executive power remain sufficiently accountable to the President.

⁴ Alpine at 16.

⁵ Id. at 17.

⁶ Id. at 19.

⁷ Id. at 29.

⁸ Id. at 14 n.2.

⁹ See Blankenship v. Financial Industry Regulatory Authority, No. 24-2860 (3d Cir. appeal filed Oct. 4, 2024).

¹⁰ Alpine at 28 n.3.

¹¹ Indeed, on the same day Alpine was issued, the Supreme Court granted certiorari in Federal Communications Commission v. Consumers’ Research, No. 24-354 (Nov. 22, 2024) (granting petition for a writ of certiorari). This case questions whether the FCC violates the nondelegation doctrine by delegating its revenue-raising power to a private entity, meaning the Court will likely soon issue new guidance on the doctrine. The Supreme Court also recently stayed a Fifth Circuit decision that invalidated, on private nondelegation grounds, enforcement provisions of the Horseracing Integrity and Safety Act and may soon grant review of that decision. Under the horseracing act, a private nonprofit authority supervises industry standards under the Federal Trade Commission’s oversight. The petitioners and their amici contend that the horseracing act was substantially modeled on FINRA’s structure and relationship to the SEC. See Horseracing Integrity and Safety Authority v. National Horsemen’s Benevolent and Protective Association, No. 24A287 (Oct. 28, 2024) (granting stay “pending the disposition of the petition for a writ of certiorari, case No. 24–433”).