Security broker challenges private regulatory organization's authority in Fourth Circuit 

RICHMOND, Va. (CN) —A security broker argued Tuesday to a Fourth Circuit panel that the industry’s regulatory authority enjoys government-level decision-making without oversight.

Frank Black and his Charlotte-based firm Southeast Investments challenged the Financial Industry Regulatory Authority’s enforcement powers, claiming the private entity’s power to ban and fine brokers violates the Constitution.

“Although Americans still enjoy the shell of their Republic, there has developed within it a very different sort of government — a type, in fact, that the Constitution was designed to prevent,” the New Civil Liberties Alliance said in support of Black.

The Financial Industry Regulatory Authority, often referred to as FINRA works on behalf of the Securities and Exchange Commission (SEC) to hold brokers accountable for violating federal and trade laws. FINRA investigated Black’s firm in 2012 and imposed sanctions and a ban in 2015 for Black’s failure to conduct required inspections of branch offices. FINRA claims Black attempted to cover up the lack of supervision by lying to examiners.

The examiners further found that Southeast Investments failed to supervise business communications by relying on an honor system for email retention. Black appealed his punishment to the SEC, which affirmed and remanded FINRA’s enforcement in part.

The commission agreed in an order that Black failed to maintain a reasonable email supervisory system or preserve certain emails and kept the fines imposed for those violations. The ban and the rest of the violations were remanded for further proceedings after the commission determined that FINRA’s failure to preserve investigatory notes was not a harmless error.

U.S. Circuit Judge Robert King, a Bill Clinton appointee, questioned whether the commission’s order was a final order ripe for review.

“You are arguing it’s final in part, and we can pick and choose,” King said on Tuesday. “We generally don’t do that. We review final orders.”

Attorney Aditya Dynar of the Pacific Legal Foundation, representing Black, urged the panel to press past jurisdiction and consider the case’s merits instead.

“The finality doctrine, or that argument, is mostly a distraction,” Dynar said.

King took issue with the attorney’s use of the word distraction.

“That’s probably something new in the red courtroom that the finality doctrine would be called a distraction,” King said. “I’ve been hearing cases in here for years and years."

Dynar argued that an Article III court, which handles cases arising from federal law, must rule when constitutional issues are present.

“If any governmental actor or a non-governmental actor is going after people for monetary fines, which is the case here, then those suits mandatorily belong in Article III courts,” Dynar said in a phone interview. “They cannot be adjudicated by non-Article III tribunals like the SEC or FINRA hearing officers."

FINRA argues that, as a private entity, they are not subject to constitutional arguments. FINRA claims private self-regulatory organizations can exercise a primary supervisory role over their members under the Securities Exchange Act, subject to comprehensive commission oversight. The Securities Exchange Act requires anyone seeking to sell securities to join an association of broker-dealers registered as a national securities association or to associate themselves with a member.

“For most of the nation’s history, securities exchanges and other self-regulatory organizations disciplined their members with little or no government involvement,” FINRA said. “This framework reflects Congress’s consistent and repeatedly reaffirmed preference for preserving private self-regulation of the securities industry in lieu of establishing direct governmental regulation, which would threaten ‘a pronounced expansion of the organization of the Securities and Exchange Commission,’ with all the attendant’ evils of bureaucracy.’”

Black asserts that the commission’s supposed oversight of FINRA is smoke and mirrors.

“The SEC steps in too late for any sort of SEC oversight to be meaningful,” Dynar said. “That only confirms that FINRA is exercising significant governmental power without any practical or pre-deprivation SEC oversight.”

FINRA holds that Black must wait until all remanded proceedings are finalized. FINRA’s attorney, Amir C. Tayrani of Gibson Dunn, emphasized that Black is not subject to fines or bans until FINRA has completed its remanded proceedings. U.S. Circuit Judge James Andrew Wynn, a Barack Obama appointee, questioned the organization’s efficiency.

“What if you just sit on the case for a while? What do we do with that?” Wynn asked Tayrani.

Wynn pressed FINRA on their power to impose lifetime bans to its members.

“Why is that not something of a governmental function?” Wynn asked.

Tayrani pointed to the commission’s veto power over any FINRA action and its power to revoke FINRA’s registration and remove board members. Tayrani also pointed out that the commission did not rubber stamp FINRA’s punishment of Black but remanded part of the organization’s findings.

Representatives from the commission and FINRA declined to comment. U.S. Circuit Judge Stephanie Thacker, another Obama appointee, completed the panel.