On November 22, 2024, the D.C. Circuit issued a landmark decision in Alpine Securities Corporation v. FINRA, a case that examines the constitutional boundaries of the Financial Industry Regulatory Authority’s (FINRA) enforcement powers. The ruling enjoined FINRA from expelling Alpine Securities Corporation without prior SEC review, emphasizing the limitations of expedited enforcement proceedings under the nondelegation doctrine.

The court’s ruling reflects both a narrow procedural focus and broader constitutional implications. While the decision curtails FINRA’s ability to expel members swiftly, it also opens the door to future challenges against self-regulatory organizations’ (SROs) authority.

The Nondelegation Doctrine in Focus

At the heart of the court’s decision is the private nondelegation doctrine, which prohibits delegating governmental authority to private entities without sufficient oversight. The court determined that FINRA’s ability to unilaterally expel a member from the securities industry—without SEC review—violates this principle. Since FINRA’s actions can effectively terminate a firm’s ability to operate, the court found that such sanctions must undergo meaningful governmental review before taking effect.

The ruling highlights a procedural gap in FINRA’s expedited proceedings. While most FINRA sanctions are subject to SEC review, expedited expulsions take immediate effect, often causing irreparable harm to the member firm before the SEC can act. The court’s decision requires FINRA to align its processes with constitutional oversight requirements.

Implications for Individuals

Although the decision focuses on member firms, its rationale could extend to individuals. FINRA frequently uses expedited proceedings to bar brokers from associating with member firms for violations such as failing to comply with Rule 8210. The majority opinion’s logic—that immediate sanctions without prior SEC review are problematic—could similarly challenge FINRA’s expedited actions against individuals.

Positive Aspects

The court’s ruling does not dismantle FINRA’s enforcement authority. It upheld the general framework of expedited proceedings and declined to adopt a broader interpretation of the nondelegation doctrine that would significantly curtail FINRA’s regulatory role. This provides some reassurance to FINRA about its ability to enforce compliance within the securities industry.

Challenges Ahead

However, the decision represents a significant setback for FINRA’s expedited enforcement capabilities. Expulsions and bars—key deterrents in FINRA’s toolkit—may now face procedural delays, reducing their efficacy. Additionally, the ruling’s acknowledgment of private nondelegation as a viable legal theory invites further challenges to FINRA’s structure and authority.

Broader Implications for Securities Regulation

The Alpine decision adds to a growing trend of judicial scrutiny over SROs and their enforcement mechanisms. By highlighting constitutional limits on private regulatory bodies, the ruling may embolden litigants to challenge other aspects of FINRA’s operations, including its rule-making authority and the applicability of the Appointments Clause.

Key questions remain:

1. Application to Individuals: Will courts extend the decision’s logic to expedited proceedings against brokers?

2. Appointments Clause Challenges: Could FINRA’s hearing officers be subject to the same constitutional requirements as SEC administrative law judges?

3. Future Regulatory Challenges: How will courts balance the need for robust enforcement with constitutional safeguards?

Conclusion

The D.C. Circuit’s decision in Alpine v. FINRA underscores the need for regulatory bodies to maintain a careful balance between enforcement efficiency and procedural fairness. As market participants and regulators adapt to this precedent, its long-term impact on securities enforcement remains to be seen. FINRA’s ability to address these challenges while preserving its regulatory mandate will shape the future of self-regulation in the U.S.

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