The U.S. Financial Industry Regulatory Authority Inc. can’t sue to recover fines in disciplinary cases against brokerages and brokers, a U.S. appeal court ruled Wednesday.
In the case of John J. Fiero and Fiero Brothers, Inc. v. FINRA, the U.S. Court of Appeals considered the question of whether FINRA has the authority to bring court actions to collect disciplinary fines. “We hold that it does not,” the court ruled, ultimately concluding that it didn’t have the authority under securities legislation, or through its own rules.
A FINRA hearing panel expelled Fiero Brothers, barred Fiero from associating with any FINRA-member firm in any capacity, and fined the Fieros US$1 million plus costs, following an enforcement hearing in 2000. After the Fieros refused to pay the fine, FINRA commenced a court action in New York’s state supreme court. The court awarded the SRO a US$1.3 million judgment, and that was upheld at by the New York Appellate Division.
The New York Court of Appeals reversed that decision on the ground that the state courts lacked jurisdiction, concluding that it fell under the jurisdiction of the federal courts. After that ruling, the Fieros sought a declaratory judgment that FINRA has no authority to collect fines through judicial proceedings. Ultimately, the regulator received a judgment in federal court for just over US$1 million, and a motion dismissing the Fieros’ claim.
On appeal, the Fieros argue that while the Exchange Act and FINRA’s rules and bylaws authorize FINRA to impose sanctions on its members, it has no authority to bring judicial actions to collect monetary sanctions. FINRA argues that it has this authority under the act, and a rule change enacted in 1990 by its predecessor the NASD.
The appeal court concludes that the Exchange Act does not provide FINRA with the necessary authority, noting that “there is no express statutory authority for SROs to bring judicial actions to enforce the collection of fines”, and it concludes that “Congress did not intend to empower FINRA to bring judicial actions to enforce its fines.”
The court notes that it could be argued that an inference of congressional intent to authorize such legal actions by FINRA can be drawn from the “seemingly inexplicable nature of a gap in the FINRA enforcement scheme: fines may be levied but not collected.” However, it says the existence of that gap does not mean this power was inadvertently omitted, because “FINRA fines are already enforced by a draconian sanction not involving court action”, which is that it can ban people from the industry.
“In sum, the issue is one of legislative intent, and we conclude that the heavy weight of evidence suggests that Congress did not intend to empower FINRA to bring court proceedings to enforce its fines,” it rules.
The court also found that a rule change enacted back in 1990 to ensure that it had the power to collect fines in court was not properly carried out. It found that the regulator characterized the change as a housekeeping amendment, when it was actually a substantive new rule, which should have been filed with the SEC and subject to a public comment period. “Because the NASD improperly designated the 1990 Rule Change, it was never properly promulgated and cannot authorize FINRA to judicially enforce the collection of its disciplinary fines,” it concludes.
IE