DC Circuit Finds Some FINRA Authority Violates Private Nondelegation Doctrine

The private nondelegation doctrine is getting an increasing amount of attention from the courts.

On Friday--the same day the Supreme Court granted certiorari in a case raising the private nondelegation doctrine--the U.S. Court of Appeals for the D.C. Circuit concluded that at least some of the authority wielded by the Financial Industry Regulatory Authority (FINRA), without adequate federal oversight, violates the private nondelegation doctrine.

Judge Millett wrote the 41-page opinion for the panel in Alpine Securities Corp. v. FINRA, joined by Chief Judge Srinivasan. Judge Walker concurred in the judgment in part and dissented in part, as he would have looked favorably on more of the challenge to FINRA than the majority.

Judge Millett summarized the case and the court's conclusions as follows:

The United States securities industry is regulated by both private entities and the federal government. These private regulators, referred to as self-regulatory organizations, date back centuries to when groups of securities traders adopted self-governing rules by which they would conduct business and ensure public trust in their operations.

Today, a private corporation, the Financial Industry Regulatory Authority ("FINRA"), regulates and oversees large parts of the securities industry. Congress, however, has overlain federal law on those private self-regulatory practices. As relevant here, federal law effectively requires most firms and individuals that trade securities to join FINRA as a condition of engaging in that business. Federal law, in turn, subjects FINRA to oversight by the Securities and Exchange Commission ("SEC") and requires that FINRA ensure that its members comply both with FINRA's own rules and with federal securities laws.

In 2022, FINRA sanctioned one of its members, Alpine Securities Corporation, for violating FINRA's private rules for member behavior and imposed a cease-and-desist order against Alpine. Alpine then sued in federal court, challenging FINRA's constitutionality.

While that lawsuit was pending, FINRA concluded that Alpine had violated the cease-and-desist order and initiated an expedited proceeding to expel Alpine from membership in FINRA. Alpine then sought a preliminary injunction from the district court against the expedited proceeding, arguing that FINRA is unconstitutional because its expedited action against Alpine violates either the private nondelegation doctrine or the Appointments Clause. The district court denied the preliminary injunction.

We now reverse only to the extent the district court allowed FINRA to expel Alpine with no opportunity for SEC review. Alpine is entitled to that limited preliminary injunction because it has demonstrated that it faces irreparable harm if expelled from FINRA and the entire securities industry before the SEC reviews the merits of FINRA's decision. Alpine has also demonstrated a likelihood of success on its argument that the lack of governmental review prior to expulsion violates the private nondelegation doctrine. We accordingly hold that FINRA may not expel Alpine either before Alpine has obtained full review by the SEC of the merits of any expulsion decision or before the period for Alpine to seek such review has elapsed.

At the same time, we hold that Alpine has not demonstrated that it will suffer irreparable harm from participating in the expedited proceeding itself as long as FINRA cannot expel Alpine until after the SEC conducts its own review. For that reason, Alpine has not shown that it is entitled to a preliminary injunction halting that proceeding altogether.

As this case comes to us in a preliminary-injunction posture, we necessarily do not resolve the ultimate merits of any of Alpine's constitutional challenges, and our determination about Alpine's likelihood of success on the private nondelegation issue is based only on the early record in this case. We leave it to the district court on remand to determine the ultimate merits of Alpine's claims.

Judge Walker's 29-page opinion concurring in the judgment in part and dissenting in part begins:

Article II of the Constitution begins, "The executive Power shall be vested in a President of the United States of America." That means private citizens cannot wield significant executive authority. Nor can anyone in the government, except for the President and the executive officers appointed and removable consistent with Article II.

The Financial Industry Regulatory Authority is a nominally private corporation. It investigates, prosecutes, and adjudicates violations of federal securities laws. Those laws generally forbid broker-dealers from doing business unless they belong to FINRA.

Today, the majority holds that the Constitution likely requires government review before FINRA may expel a company from its ranks and thereby put that company out of business. That holding is a victory for the Constitution.

But it is only a partial victory because the problems with FINRA's enforcement proceedings run even deeper. FINRA wields significant executive authority when it investigates, prosecutes, and initially adjudicates allegations against a company required by law to put itself at FINRA's mercy. That type of executive power can be exercised only by the President (accountable to the nation) and his executive officers
(accountable to him).

By flouting that principle through an "illegitimate proceeding, led by an illegitimate decisionmaker," FINRA imposes an irreparable injury that this court should prevent by granting the requested preliminary injunction in its entirety.

I respectfully dissent from the majority's decision to deny that relief.

I am quite sure Alpine Securities will file a petition for certiorari. The question is whether FINRA will do the same (or whether it will file a petition for rehearing en banc).