DC Circuit Sidesteps Questions Around FINRA’s Constitutionality

On November 22, 2024, the US Court of Appeals for the DC Circuit issued its decision in the closely watched Alpine Securities Corp. v. FINRA case. Declining to decide larger constitutional questions, the court instead reversed on narrow grounds the district court’s denial of Alpine’s request for a preliminary injunction. The court’s decision, however, tees up further questions and challenges to FINRA’s ability to carry out its enforcement mandates and whether and when constitutional issues are triggered.

In 2022, following a multiyear investigation, FINRA charged Alpine Securities Corporation (Alpine) with violations of several FINRA rules, including charging unreasonable fees, unfair and excessive commissions, and misappropriation of customer property.[1] As a result of the myriad FINRA violations, FINRA issued a cease-and-desist order[2] that prohibited Alpine from charging fees and commissions deemed unreasonable and ordered Alpine to pay restitution to its affected customers.[3] Alpine sued FINRA in the US District Court for the Middle District of Florida,[4] challenging FINRA’s constitutionality under the nondelegation doctrine, Appointments Clause, and First, Fifth, and Seventh Amendments.[5]

Alpine raised two principal constitutional challenges. First, under the Appointments Clause, Alpine argued that FINRA disciplinary proceedings violate Article II of the Appointments Clause because its Hearing Officers function like the SEC’s administrative law judges (ALJs) and are not appointed by the government. Second, under the nondelegation doctrine, even if FINRA is not a “state actor,” it has been delegated too much regulatory authority (i.e., to expel a firm) without sufficient government oversight.

While Alpine’s suit was pending, FINRA found that Alpine had violated the cease-and-desist order by continuing to charge fees and commissions in violation of the order.[6] As a result, FINRA initiated an expedited disciplinary proceeding against Alpine and sought its immediate expulsion from FINRA.

In the federal litigation, Alpine sought a preliminary injunction against FINRA’s expedited proceeding, which the district court denied.[7] The district court rejected all of Alpine’s constitutional arguments, and denied Alpine’s motion to stay the FINRA enforcement action.[8] Alpine appealed this decision and the Court of Appeals granted Alpine an emergency injunction pending appeal, which enjoined FINRA’s expedited proceeding until further briefing was completed.[9] The DC Circuit’s November 22 opinion followed.

DECISION

While many eagerly anticipated the court’s decision on FINRA’s constitutionality, the November 22 decision fails to reach Alpine’s principal constitutional challenges. In reversing and remanding to the district court, the 2-1 panel reversed the district court’s denial of a preliminary injunction only with respect to Alpine’s expulsion from FINRA without SEC review.[10] Reversing the district court, the circuit court held that Alpine faced irreparable harm “if expelled from FINRA and the entire securities industry before the SEC reviews the merits of FINRA’s decision.”[11] This is because FINRA’s decisions to expel members through expedited proceedings take effect before SEC review. According to the court, any review that the SEC does after the expulsion takes place is a “largely academic exercise.”[12]

The panel further noted that Alpine would face irreparable harm without the injunction because even if the SEC ultimately reverses FINRA’s decision, the harm of being forced out of business in the meantime outweighs any harm to FINRA.[13] Lastly, the panel found that public interest weighs in favor of reversing the preliminary injunction because it would allow “Alpine’s constitutional claims [to] be fully litigated, without being throttled by a shutdown of its business.”[14] The panel declined to reverse Alpine’s denial of a preliminary injunction under the Appointments Clause, noting that Alpine would not suffer irreparable harm on this issue.

Judge Walker concurred in the judgment in part and dissented in part. Judge Walker agreed that FINRA should be enjoined from unilaterally expelling Alpine, but he dissented from the majority’s decision not to enjoin the entirety of the enforcement proceeding.[15] He stated that “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 be the President (accountable to the nation) and his executive officers (accountable to him).”[16]

In his view, FINRA’s power violates the nondelegation doctrine, and a post-hoc review by the SEC does not satisfy the US Supreme Court’s decision in Lucia v. SEC, 138 S. Ct. 2044, 2051 (2018), which held that the SEC’s ALJs are “officers of the United States” who must be appointed and are removable. Judge Walker stated that FINRA “functions in a way similar to a government agency” in part because it acts in “‘an adjudicatory and prosecutorial capacity’ and ‘is required by statute to enforce the securities laws.’’”

He further added that “FINRA is likely a private entity exercising significant executive authority. If so, FINRA subverts the constitutional design.” Because in Judge Walker’s view FINRA hearing officers exercise “executive authority” when deciding matters they should be considered “officers of the United States” and should be appointed to their positions consistent with the Appointments Clause. For that reason, Judge Walker would have granted Alpine its preliminary injunction on this basis as well.

TAKEAWAYS

While the court did not explicitly weigh in on the constitutional issues raised by Alpine, the merits issues will not go away. Procedurally, since the court found Alpine demonstrated a likelihood of success, FINRA may not expel Alpine until Alpine has obtained full SEC review of the merits of FINRA’s expulsion decision, which is likely to take considerable time.

In addition, with this reversal and remand to the district court, Alpine can attempt en banc review to the DC Circuit Court of Appeals, or appeal to the Supreme Court to see if any other judges or justices agree with Judge Walker’s reasoning. This too would take time.

Practically speaking, there are a few considerations to keep in mind following this decision. First, it is important to note that this narrow decision in part rests on Alpine’s rather unique situation, i.e., immediate expulsion for its allegedly flagrant FINRA violations. As such, future constitutional challenges to FINRA’s authority may arise in circumstances that are not quite so extreme or procedurally rare.

Second, Judge Walker’s concurrence and dissent—while not binding—calls into question the entirety of FINRA’s enforcement arm, which is exclusively administrative in nature. While Alpine’s arguments are novel, given the changing of tides with a new administration poised to take office in 2025, it is possible they gain traction with other jurists. Given that FINRA did not receive constitutional clarity, future litigants may be incentivized to challenge FINRA enforcement proceedings on similar constitutional grounds.

Third, some commentators have recently suggested that FINRA be abolished and absorbed by the SEC. At this stage, it is unclear whether the Trump-Vance administration will adopt such a policy. If FINRA were to be absorbed by the SEC, it would eliminate some of the constitutional issues in Judge Walker’s opinion. But it would also cause significant uncertainty in the regulated marketplace as FINRA’s enforcement program has long operated without intervention from the SEC (except in the case of reviewing FINRA disciplinary orders).