FINRA Cannot Sue to Collect Fines

FINRA has no authority to bring an action in federal court to collect fines it imposes on members according to the Second Circuit Court of Appeals. Likewise, a rule the SRO issued over two decades ago under which it claimed such authority is invalid. Fiero v . Financial Industry Regulatory Authority, Nos. 09-1556-cv, 09-1863-cv (2nd Cir. Oct. 5, 2011) [an enhanced version of this opinion is available to lexis.com subscribers / unenhanced version available from lexisONE Free Case Law].    

 The action traces to a FINRA disciplinary proceeding brought against John Fiero and Fiero Brothers, Inc. The firm was a member of FINRA and a registered broker dealer with the SEC. In 1998 a disciplinary proceeding was brought which ended with findings that Mr. Fiero and his firm violated Exchange Act Section 10(b). The hearing panel expelled the firm and barred Mr. Fiero. It also imposed a fine of $1 million plus costs. The findings were affirmed on appeal.

Subsequently, FINRA filed an action in the New York Supreme Court to collect the fine. That court awarded the SRO a judgment of $1,329,724.54 which was affirmed on appeal. The New York Court of Appeals however reversed, concluding that the state courts lacked subject matter jurisdiction.

Mr. Fiero and his firm subsequently filed a declaratory judgment action in Federal Court seeking a ruling that FINRA did not have authority to bring a court action to collect a fine. The district court dismissed the complaint.

The Second Circuit reversed, concluding that FINRA does not have the authority to bring such an action. Exchange Act Section 15A(b) governs the statutory authority and obligations of SROs the court noted. Under that Section the organization has the authority to punish members for violations of their rules by "expulsion, suspension, limitation of activities, functions, operations, fine, censure, being suspended or barred from being associated with a member, or any other fitting sanctions." While the section authorizes imposing fines, there is no express authority for an SRO to bring an action in court to collect the penalty.

An analysis of the statutory scheme does not suggest that congress intended to empower FINRA to bring judicial actions to enforce its fines. The statutory scheme "carefully particularizes an array of available remedies, including permissible actions in the federal courts" the Second Circuit concluded. None of those specify that an SRO can take the action FINRA seeks to do here. This lack of authority is confirmed by the fact that where FINRA enforces statutory or administrative rules or its own rules "it is exercising the powers granted to it under the Exchange Act . . ." The omission of specific authority does not suggest an omission. Rather, "FINRA fines are already enforced by a draconian sanction not involving court action. One cannot deal in securities with the public without being a member of FINRA. When a member fails to pay . . . " he is excluded from the industry. Indeed, this is the manner in which FINRA has historically collected its fines.

Finally, any reliance on the rule promulgated in 1990 by the SRO which purports to give it authority to take such action is misplaced. To be effective the rule had to be to be properly promulgated. It was not. To initiate the process the rule has to be filed with the SEC, notice published and interested parties given an opportunity to comment. An exception for "housekeeping" provisions permits a rule to be filed with the SEC and become immediately effective. FINRA invoked this exception and skipped the notice and comment period. This was improper the court concluded since the rule is not a "housekeeping" provision. Thus the rule was never properly promulgated. Accordingly, FINRA lacks any authority to file an action in court to collect a penalty it imposes on a member.

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