Judicial Limitations on Investor Protection: Fiero v. FINRA (Part 1)

We have noted on this blog before that one of the most significant impediments to investor and shareholder protection will come from the courts.  

In some respects, this includes the Delaware courts.  While they have always been management friendly, this has become more pronounced in recent years.  The days of shareholder victories such as Van Gorkom or not complete losses such as Unocal are long over, replaced by the likes of Disney and Airgas.  But the Delaware courts are simply engaging in a variation on an expected theme.

The federal courts, however, have been the most significant proponents of this approach.  The Supreme Court has, for example, stretched credible analysis in an effort to pin pack Rule 10b-5.  Certainly the recent decision in Janus fits into that category. 

Similarly, the DC Circuit's decision in Business Roundtable is not justifiable based upon the precedent.  While it may have been possible to write a narrow opinion to strike down Rule 14a-11, the court did nothing of the kind.  It chose: to second guess the studies used by the SEC, to require the SEC to assume legal violations then assess the costs, and to apply, during a cost benefit analysis, fiduciary duty standards that appear inconsistent with state law.  For more on this decision, see Shareholder Access an Uneconomic Economic Analysis:  Business Roundtable v. SEC.

The most recent addition to this approach is Fiero v. FINRA.  In what has to be viewed as a surprising decision, the Second Circuit decided that FINRA, which has the authority to assess fines, does not have the authority to collect them. 

The case is not necessarily wrong.  The language in the statute concerning FINRA's right to bring an action to collect unpaid fines is ambiguous.  But the analysis used by the Second Circuit suggests that the outcome was driven more by a desire to pin pack the authority of FINRA than to ascertain the real intent of Congress.  This can be seen from the analysis used by the court in reaching the unexpected conclusion. 

The case has broad potential implications.  It raises questions about the role of SROs in the enforcement of the federal securities laws.  We will spend the next few posts looking at the case and examining the reasoning used by the Second Circuit. 

Comments

[John Fiero]

The opinion of the author makes me chuckle. It's because of this mentality that FINRA/NASD runs unchecked and out of control. Of all the high powered lawyers in all the big law firms, no one has ever had the common sense to challenge any of the FINRA self proclaimed policies. Not once, but twice we proved FINRA to be wrong in their interpretation of their own rules.

On the other hand Mr. Brown is a FINRA arbitrator- enough said.

The number of broker dealers have steadily declined in recent years. If FINRA isn't careful, they will be regulating themselves soon.