The U.S. securities industry operates under a dual regulatory framework involving both federal oversight and private self-regulatory organizations. In the late 1700's, securities traders began taking efforts to create self-policing stock markets in the United States by establishing rules to build public trust to maintain market integrity. Following the Great Depression, Congress passed a series of laws - including Securities Exchange Acts of 1933 & 1934 – regulating the securities industry. Today, the Financial Industry Regulatory Authority (FINRA), a private corporation, is registered with the Securities and Exchange Commission (SEC) as an authorized securities association under Section 15A of the Securities Exchange Act of 1934, and plays a central role in regulating the securities industry, along with federal law, requiring Broker-Dealers and Registered Representatives to obtain FINRA membership to operate within the securities industry. This legal framework also subjects FINRA to oversight by the SEC, requiring it to enforce compliance with its own rules as well as federal securities laws.
In 2022, FINRA sanctioned Alpine Securities Corporation ("Alpine") for alleged rule violations, based on improper fee arrangements and its handling of client accounts, which resulted in the issuance of a cease-and-desist order. Aline sued in federal court under the case caption Alpine Securities Corp. v. Financial Industry Regulatory Authority (No. 1:23-cv-01506), challenging FINRA's constitutionality, arguing its actions violated the private nondelegation doctrine and the Appointments Clause. While the case was pending, FINRA accused Alpine of breaching the cease-and-desist order and initiated expedited proceedings to expel the firm from membership. In response, Alpine sought a preliminary injunction, contending its expulsion without prior SEC review would cause irreparable harm and violate constitutional safeguards.
The United State District Court for the District of Columbia denied Alpine's request, but on appeal, the United States Court of Appeals for the District of Columbia Circuit partially reversed (No. 23-5129). The appellate court held that Alpine was entitled to a preliminary injunction preventing expulsion until the SEC fully reviewed FINRA's decision or the window for such review closed. The court found that expulsion without prior SEC oversight likely violates the private nondelegation doctrine and poses irreparable harm to Alpine, as expulsion effectively excludes it from the securities industry. The court declined to halt the expedited proceeding altogether, however, reasoning that Alpine failed to show irreparable harm from participating in the process itself, provided expulsion does not occur without SEC review.
The Nondelegation Doctrine
Alpine asserted two main constitutional arguments. First, it argued that FINRA is a private entity to which the government has impermissibly delegated excessive power, in violation of the private nondelegation doctrine. Alternatively, Alpine contended if FINRA is deemed a governmental entity, its expedited proceeding violate the Appointments Clause of the United States Constitution. The court began its analysis with Alpine's private nondelegation claim, under the assumption that FINRA and the United States are correct in asserting that FINRA is a private - and not a governmental - entity.
The court held that Alpine was entitled to a limited preliminary injunction, finding the firm demonstrated a likelihood of success on the merits, particularly regarding FINRA's authority to unilaterally expel a member without governmental oversight. Expulsion by FINRA effectively prohibits the expelled entity from engaging in securities trading altogether, as federal law transforms FINRA membership decisions into legal prohibitions on such activities. The lack of SEC review before an expulsion takes effect likely violates the private nondelegation doctrine, which requires that any delegation of regulatory authority to a private entity be subject to supervision by an accountable government agency. Without such oversight, FINRA's actions exceeded the constitutional limits on delegations of governmental power. Saad v. Sec. & Exch. Comm'n, 873 F.3d 297 (D.C. Cir. 2017); see 15 U.S.C. § 78s(e).
Congress has long delegated regulatory authority to private entities, but such delegations are constitutional only if the private entity acts as an adjunct to a government agency that retains ultimate authority. A private entity must function under the supervision of a government actor capable of "approving, disapproving, or modifying" the private entity's decisions. Sunshine Anthracite Coal Co. v. Adkins, 310 U.S. 381, 388, 399 (1940). The SEC has the authority to approve, disapprove, or modify FINRA's actions pursuant to 15 U.S.C. §78s(e)(1).
Here, the Court concluded that FINRA's expedited expulsion of Alpine, without prior SEC review, deviated from the constitutional requirement for governmental supervision over private regulatory actions. Accordingly, the court reversed the lower court's decision and granted a preliminary injunction barring FINRA from expelling Alpine until the SEC conducts its review.
Review of FINRA Expulsions Through Expedited Proceedings
Expulsions imposed under FINRA's expedited proceedings differ significantly from typical disciplinary actions, particularly in how they bypass meaningful SEC oversight before taking effect. Under FINRA Rules 9360 and 9559, an expulsion order in expedited proceedings becomes effective immediately upon issuance and service. Federal law, specifically 15 U.S.C. §78s(d)(1-2), mandates that SEC review can only occur after FINRA has issued its final decision and imposed sanctions. Taken together, these rules and statutes make it clear that SEC oversight cannot occur before the expulsion takes effect.
Alpine demonstrated that, under this process, the SEC lacks ultimate control over FINRA's expulsion decisions because such orders take effect immediately, prior to SEC review. The severe consequences of expulsion render any subsequent review by the SEC largely academic, as the damage to an expelled member's business is often irreversible by the time the review occurs.
Under federal law, entities cannot trade securities unless they belong to a registered securities association. 15 U.S.C. §78 o(b)(1). As FINRA is the sole registered securities association in the United States, expulsion effectively bars the entity from operating in the securities industry. Expelled members are barred from trading securities on behalf of themselves or their clients, leaving many unable to continue operations before obtaining SEC review. Alpine argued that this reality would force it out of business.
While the SEC has the authority to stay an expulsion order, in practice this power does not necessarily diminish potential constitutional deficiencies. A petition for SEC review does not automatically stay an expulsion order. Under both FINRA rules and federal law, an expelled member must separately request a stay after filing an application for SEC review, 17 C.F.R. §201/401(a) (1-2), and bear the burden of proving entitlement to the stay. The SEC rules treat stays as extraordinary remedies, and require the following:
- The petitioner is likely to succeed on the merits.
- They will suffer harm without a stay.
- No other party will suffer substantial harm from the stay, and
- The stay serves the public interest. NYPPEX, LLC, Exchange Act Release No. 100177, 2024 WL 2289209, at *1 (S.E.C. May 20, 2024).
Even when expedited, the SEC's stay process takes time. While FINRA's counsel noted that Alpine previously received an interim administrative stay within two business days, such stays are discretionary and rare. Full consideration of stay motions can take weeks or months, during which the expelled member's business may collapse. Given the immediate and total bar on securities trading imposed by expulsion, even short delays can be catastrophic.
Stay Decisions are not Merits Decisions
It is important to note that the SEC's decision to grant or deny a stay does not reach the merits of the underlying expulsion. As discussed above, the private nondelegation doctrine requires that a government actor retain the discretion to approve, disapprove, or modify a private entity's regulatory decisions. See Adkins, 310 U.S. at 388, 399. However, in reviewing a stay application, the SEC explicitly refrains from ruling on the merits, reserving final resolution for the full appeal process. This regulatory framework allows FINRA to effectively determine who may trade securities under federal law without timely or meaningful government oversight.
While the government points out that the SEC has some statutory authority to waive the requirements of FINRA membership in certain cases, it made no showing that Alpine could realistically obtain such a waiver, particularly while the expedited proceeding is pending.
Preliminary Injunction Factors Favor Alpine
The remaining factors for granting a preliminary injunction- irreparable harm, balance of equities and public interest- favored Alpine.
Irreparable Harm: Expulsion from FINRA excludes entities form the securities industry, which would have compelled Alpine to cease their operations immediately. Courts consistently recognize that the destruction of a business constitutes irreparable harm. Washington Area Transit Comm'n v. Holiday Tours, Inc., 559 F.2d 841. 843. While FINRA argued that Alpine could resume operations if the SEC overturns the expulsion, the court reasoned that this claim "blinks reality." A business deprived of income cannot realistically expect to reopen months or years after being forced to close.
Balance of Equities: The harm to Alpine outweighed the potential disruption to FINRA's enforcement efforts. FINRA argued that granting injunctive relief could open the floodgates for similar challenges by other members under investigation. However, the Court's maintained a narrow window for its opinion, addressing only expedited expulsion proceedings where the irreversible nature of the sanction precluded timely SEC review.
Public Interest: While FINRA has a legitimate interest in enforcing its rules, its interest does not outweigh the need for constitutional safeguards in the regulatory process. Ensuring meaningful governmental oversight of FINRA's actions aligns with public interest in maintaining accountability and fairness in securities regulation.
In sum, FINRA's expedited expulsion process, as currently structured, falls short of the constitutional requirements of the private nondelegation doctrine. Immediate expulsion without prior SEC review undermines the principle that private regulatory authority must be subject to meaningful government supervision. Accordingly, the preliminary injunction barring FINRA from expelling Alpine before full SEC review was warranted.
The Appointments Clause Claims
The court also addressed Alpine's claims under the Appointments Clause, in which Alpine argued that FINRA's hearing officers qualify as officers of the United States and therefore must be appointed in accordance with the Appointments Clause and subject to at-will removal. However, the court concluded that Alpine is not entitled to a preliminary injunction on this front because it failed to demonstrate irreparable harm resulting from the alleged violations while the district court case remains pending.
To secure a preliminary injunction, a party must meet a high standard, showing that its injury is both certain and great. Chaplaincy of Full Gospel Churches v. England, 454 F.3d 290, 297–298 (D.C. Cir. 2006). The harm must be so significant that it creates a clear and present need for expedited equitable relief, even without benefit of full factual and legal development. Id.
Alpine argued that FINRA's actions could force it to shut down. The court, however, found that this concern no longer justified immediate relief. In its earlier ruling the court determined that FINRA cannot expel Alpine before the SEC reviews and decides whether such an expulsion is proper. As a result, the final authority to expel Alpine rests with the SEC. Since Alpine's expulsion after full SEC review is speculative and uncertain at this stage.
The court acknowledged that if FINRA's structure were ultimately found to violate the Appointments Clause, Alpine might be entitled to a new hearing before a properly appointed officer but such decisions should not be addressed until after the SEC issues its decision as Alpine does not claim irreparable harm from the SEC review process itself. Accordingly, the court declined to express any opinion on these broader constitutional questions at this stage.
Conclusion
Alpine underscores the high stakes involved in FINRA's expedited proceedings and the significant challenges firms face when contesting such actions. Although judicial remedies, including preliminary injunctions, are difficult to obtain, companies must strategically position themselves to address the immediate business risks while preserving their legal arguments. By understanding FINRA's rules, acting promptly to seek relief, and relying on experienced legal counsel, businesses can better navigate this complex regulatory landscape.
The attorneys at Wood Smith Henning & Berman have experience, and a thorough understanding in effectively navigating FINRA and SEC rules. Our team is available to assist help you better navigate this complex regulatory landscape to protect your interests. Please do not hesitate to reach out to the authors of this article or a member of our team for more information