U.S. Court of Appeals Holds that FINRA Lacks Authority to Collect Fines Through Court Proceedings

A recent decision by the United States Court of Appeals for the Second Circuit found that the Financial Industry Regulatory Authority (“FINRA”) has no legal authority to bring an action in court to collect fines imposed on its members. This decision exposes a noticeable gap in FINRA’s enforcement powers; it can levy fines, but it cannot seek enforcement concerning collection of those fines in court.

The case involved a former penny-stock brokerage firm, Fiero Brothers, and its owner, John J. Fiero (“Fiero”). A disciplinary proceeding found that Fiero and his firm violated Section 10(b) of the Exchange Act for a manipulative activity known as “naked short-selling.” The firm was expelled from FINRA and Fiero was barred from the industry. In addition to the expulsion, a $1 million fine was imposed which FINRA eventually attempted to collect in court. Fiero and his firm then filed a declaratory judgment action in federal court seeking a ruling that FINRA did not have authority to bring a court action to collect the fine. In reversing the lower court’s holding, the Second Circuit concluded that FINRA lacks the authority to bring court actions to collect disciplinary fines it has imposed. The court noted, however, that FINRA still has the authority to enforce its fines by revoking a member’s registration, resulting in expulsion from the industry, which itself provides a strong incentive for firms and individuals to pay fines imposed by FINRA.

On its face, the decision seems to reduce FINRA’s enforcement power and remove some of the “teeth” from its ability to enforce its rules. However, from a practical perspective, FINRA still maintains its most effective weapons: suspension or a permanent bar from serving as a broker-dealer or registered representative of a broker-dealer. FINRA also still has the power to initiate a disciplinary proceeding against any FINRA member or associated person for violating any FINRA rule, SEC regulation, or statutory provision of federal securities laws. Accordingly, while the decision is an important one for individuals who are willing to walk away from the broker-dealer industry, FINRA still has significant powers to impose fines for violations of its rules and enforce those fines through the threatened suspension or expulsion from the industry. In addition, the court noted that FINRA may propose a rule change granting it the authority to collect fines through the courts.

For additional information regarding this case, please contact Brent Cunningham, Associate Attorney, at brent.cunningham@jackolg.com or 619-298-2880.

Advertisements

Leave a comment

Filed under Investment Advisers

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s