By: Hannah Lief

Alpine Securities Corporation (“Alpine”), a broker-dealer, is challenging the delegation of authority by the Securities and Exchange Commission (“SEC”) to Financial Industry Regulatory Authority (“FINRA”) in Alpine Securities Corp. v. Financial Industry Regulatory Authority, Inc.[1] The lawsuit arises out of Alpine’s constitutional challenge to FINRA’s enforcement of securities regulations.[2] During district court proceedings, FINRA expedited an enforcement order against Alpine, directing the corporation to cease its operations in the securities industry for fraudulent financial activity.[3] Consequently, Alpine sought an emergency motion for a preliminary injunction or temporary restraining order (“TRO”), urging the district court to consider its constitutional challenges and pause the expedited enforcement proceeding against it.[4] After the court denied Alpine’s emergency motion, Alpine appealed, and the case was subsequently brought to the U.S. Court of Appeals for the District of Columbia.[5] On appeal, Alpine reinforced its argument that FINRA does not possess the authority to enforce securities regulations on behalf of the SEC.[6] In response, the Court of Appeals granted Alpine’s emergency injunctive motion, but has yet to decide on the constitutional merits of Alpine’s argument.[7]

            Alpine’s questioning of the SEC’s delegation of authority to FINRA has its foundation in the Appointments Clause of the Constitution, which permits federal agencies to delegate tasks to administrative law judges (“ALJs”) who fall within the meaning of “Officers.”[8] “Officers” must be officially appointed by the President, a court of law, or a head of a department.[9] The SEC, an independent federal agency, supervises FINRA by ensuring that FINRA’s enforcement activities provide clear compliance guidelines for investors.[10] FINRA is not a federal agency, but works jointly with the SEC to oversee the broker-dealer industry.[11] Of importance, FINRA actors are not officially appointed by any of the requisite parties set out in the Appointments Clause.[12] In 2018, the Supreme Court in Lucia v. SEC expressed that, in order to demonstrate that an actor falls within the meaning of “Officers,” it must be shown that (1) the actor possesses continued authority established by law to act, and (2) exercise significant authority pursuant to the laws of the United States.[13] In Lucia, the Supreme Court held that SEC ALJs are “Officers” who must act under official appointment.[14]

            If Alpine’s argument that FINRA actors are unconstitutionally enforcing securities regulations is endorsed by the Court of Appeals, the SEC may need to modify its enforcement structure. Specifically, the SEC may need to act on its inherent authority to administer regulations or delegate authority to “Officers” who have been officially appointed by the requisite parties.[15] FINRA will likely appeal the decision if the Court of Appeals’ holding is favorable to Alpine, leading to the pressing question of whether the Supreme Court will hear the case and thus adhere to the principles set forth in Lucia. If the Supreme Court is presented with the case and holds that FINRA actors are “Officers” without official appointment, investors may not need to abide by future FINRA enforcement proceedings, leading the SEC to take full jurisdiction over fraudulent activity. A decision to define FINRA actors as enforcing regulations without official authority may encourage the SEC, as head of a department, to officially elect ALJs in an attempt to avoid constitutional barriers.[16]

            The impact of this case is far-reaching, as it raises questions on the validity of past FINRA disciplinary actions directed at broker-dealers. Moreover, investors may feel apprehensive to interact with broker-dealers given that the financial regulatory landscape is being questioned by the courts.[17] If the Court of Appeals eliminates FINRA’s authority to act in the securities industry, this may present a large burden for FINRA, as it has expended time, effort, and resources in acting on behalf of the SEC.[18] Likewise, this case poses constitutional implications for other non-federal agencies that act on behalf of federal organizations without official appointment. Thus, the issue presented to the U.S. Court of Appeals for the District of Columbia has the potential to narrow the financial regulatory landscape, carrying strong constitutional implications for federal agencies, investors, and broker-dealers.

[1] See Martina Barash, FINRA Enforcement Authority Turns on Looming Appeals Court Fight, BL (Feb. 7, 2024, 10:00 AM), https://www.bloomberglaw.com/bloomberglawnews/litigation/X1TTGPKO000000?bna_news_filter=litigation#jcite; Alpine Sec. Corp. v. Fin. Indus. Regul. Auth., Inc., No. 23-5129, 2023 U.S. App. LEXIS 14420, at *1 (D.C. Cir. June 8, 2023).

[2] Scottsdale Cap. Advisors Corp. v. Fin. Indus. Regul. Auth., No. 23-1506, 2023 U.S. Dist. LEXIS 99350, at *1 (D.D.C. June 7, 2023).

[3] Id. at *2. See also Press Release, FINRA, Ray Pellecchia, FINRA Extended Hearing Panel Expels Alpine Securities; Orders Alpine to Pay $2.3 Million in Restitution to Customers (Mar. 24, 2022), https://www.finra.org/media-center/newsreleases/2022/finra-extended-hearing-panel-expels-alpine-securities-orders-alpine (stating that FINRA ordered Alpine Securities Corporation to compensate consumers for “converting and misusing customer funds and securities, engaging in unauthorized trading, charging customers unfair prices in securities transactions and unreasonable fees, and making an unauthorized capital withdrawal.”).

[4] Scottsdale Cap. Advisors Corp., 2023 U.S. Dist. LEXIS 99350, at *2–*3.

[5] Id. at *3; Alpine Sec. Corp., 2023 U.S. App. LEXIS 14420, at *1.

[6] See Barash, supra note 1.

[7]Alpine Sec. Corp., 2023 U.S. App. LEXIS 14420, at *1–*2; See D.C. Circuit Questions Constitutionality of FINRA Hearing Officers, Enjoins Disciplinary Proceeding, Sidley Austin LLP (July 6, 2023), https://www.sidley.com/en/insights/newsupdates/2023/07/dc-circuit-questions-constitutionality-of-finra-hearing-officers.

[8] Lucia v. SEC, 138 S. Ct. 2044, 2051 (2018); U.S. Const. art. II, § 2, cl. 2.

[9] Lucia, 138 S. Ct. at 2051.

[10] See Barash, supra note 1.

[11] About FINRA, FINRA, https://www.finra.org/about; Scottsdale Cap. Advisors Corp. v. Fin. Indus. Regul. Auth., No. 23-1506, 2023 U.S. Dist. LEXIS 99350, at *4–*6 (D.D.C. June 7, 2023) (explaining the allocation of authority by the SEC to FINRA).

[12] See Scottsdale Cap. Advisors Corp., 2023 U.S. Dist. LEXIS 99350, at *4 (discussing that FINRA members are not officially appointed by the SEC or any other federal agency, court of law, or President, but are instead appointed by the FINRA board comprising of twenty-two members).

[13] Lucia, 138 S. Ct. at 2047 (laying out a two-prong test to qualify as an “Officer.”).

[14] Id. (“An ALJ assigned to hear an SEC enforcement action has the “authority to do all things necessary and appropriate” to ensure a “fair and orderly” adversarial proceeding.”).

[15] SEC, Plan of Allocation and Delegation of Functions by FINRA To [FINRA REGULATION, INC.] Subsidiaries, https://www.sec.gov/files/rules/sro/finra/2019/34-85764-ex5.pdf; U.S. Const. art. II, § 2, cl. 2.

[16] See U.S. Const. art. II, § 2, cl. 2.

[17] See Alpine Sec. Corp. v. Fin. Indus. Regul. Auth., Inc., No. 23-5129, 2023 U.S. App. LEXIS 14420, at *1 (D.C. Cir. June 8, 2023).

[18] See Scottsdale Cap. Advisors Corp. v. Fin. Indus. Regul. Auth., No. 23-1506, 2023 U.S. Dist. LEXIS 99350, at *6–*9 (D.D.C. June 7, 2023).