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Second Circuit Rules FINRA Cannot Enforce Fines in Court

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  • fundlaw
    The U.S. Court of Appeals for the Second Circuit has ruled that the Financial Industry Regulatory Authority does not have the authority to bring court actions
    Message 1 of 1 , Oct 6, 2011
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      The U.S. Court of Appeals for the Second Circuit has ruled that the Financial Industry Regulatory Authority does not have the authority to bring court actions to collect disciplinary fines. Fiero v. FINRA, Docket No. 09-1556-cv (2d Cir. Oct. 5, 2011). The ruling does not affect FINRA's ability to revoke the registration of a member that fails to pay a fine, which would effectively bar the member from the brokerage industry.

      FINRA argued that it is authorized to enforce its fines in court by the Securities Exchange Act of 1934, which gives FINRA and other self-regulatory organizations the authority to fine their members. The court was unpersuaded by this, noting that the 1934 Act has no provision for court enforcement of such fines and that it was not until 1990 that FINRA (then the NASD) sought to enforce fines or any other sanction through judicial actions in its own right. In that year the NASD announced that it intended to pursue other available means, including court actions, for the collection of fines. NASD Notice to Members 90-21. The NASD filed the policy change as a rule change with the Securities and Exchange Commission, but designated it as a nonsubstantive change that did not require public notice and comment. Release No. 34-28227 (July 18, 1990).

      The court ruled, however, that the 1990 rule change was not simply a house-keeping policy change that could bypass the notice and comment period that the 1934 Act requires for substantive rule changes. Instead, it was a new substantive rule affecting the rights of barred and suspended members, and it required publication of a notice and comment period. Because the NASD improperly designated the rule change, it was never properly promulgated and cannot authorize FINRA to judicially enforce the collection of its disciplinary fines, the court said.

      FINRA has not yet had a public reaction to the decision, other than to say that it is reviewing the ruling and weighing its options. It seems likely, however, that a properly promulgated rule would be judicially enforceable, so repromulgation may be in the cards. The court's opinion is also likely to result in far more attention being given in the future to whether rule and policy changes are really mere house-keeping matters that do not require notice and comment.

      The Second Circuit decision is available online at

      http://caselaw.findlaw.com/us-2nd-circuit/1581693.html



      John M. Baker <JMB@...>
      Stradley Ronon Stevens & Young, LLP http://www.stradley.com
      1250 Connecticut Avenue, NW, Suite 500
      Washington, DC 20036
      202.419.8413
      202.822.0140 fax
      FundLaw Listowner http://groups.yahoo.com/group/fundlaw
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