Judicial Limitations on Investor Protection: Fiero v. FINRA (Part 2)

We are examining Fiero v. Financial Industry Regulatory Authority, 2011 U.S. App. LEXIS 20173 (2^nd Cir. Sept. 29, 2011), the recent decision by the 2nd Circuit that concluded FINRA lacked the authority to file an action to collect fines imposed on members. 

FINRA has the authority to impose fines on members.  See Section 15A of the Exchange Act, 15 USC §78o-1.  Section 15A was added to the Exchange Act in 1938 as part of the Maloney Act, an attempt to address the over-the-counter market.  The provision provided that member organizations could register with the SEC if they met the requirements of the statute.  These included requirements that: 

• its members and persons associated with its members shall be appropriately disciplined for violation of any provision of this title, . . . or the rules of the association, by expulsion, suspension, limitation of activities, functions, and operations, fine, censure, being suspended or barred from being associated with a member, or any other fitting sanction.

To the extent imposing a fine, the member can appeal to the SEC, 15 USC  §78s(d), and from there to the US Court of Appeals.  See 15 USC  §78y. Only one organization registered, the NASD.  See In re NASD, 5 SEC 627 (1939).  The approval was apparently not controversial.  See Id. ("After due notice a public hearing was held before the full Commission on August 1, 1939 on said application. No one appeared except representatives of the applicant and counsel to the Commission."). 

In Fiero, the NASD imposed a fine on a member.  The member did not appeal the action to the Commission.  See FINRA v. Fiero, 853 NYS 2d 267 (NY 2008).  The member, however, refused to pay the amount and FINRA brought an action in state court to collect the amount.  The action was, however, ultimately dismissed.  The state court found that the matter involved an action under the Exchange Act.  Because Section 27 vested exclusive jurisdiction in federal courts, state courts lacked subject matter jurisdiction.  See FINRA v. Fiero, 853 NYS 2d 267 (NY 2008). 

The member then brought an action seeking declaratory relief in federal court arguing that FINRA had no authority to collect fines through a judicial proceeding.  The district court declined to provide the requested relief.  On appeal, however, the Second Circuit sided with the member.  While Section 15A permitted the imposition of fines, it did not provide “express statutory authority for SRO's to bring judicial actions to enforce the collection of fines.”  In arriving at the decision, the court relied on the intent of Congress in adopting Section 15A. 

We will examine the analysis in the next post.