Judicial Limitations on Investor Protection: Fiero v. FINRA (Part 3)

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.

The court gave a number of reasons for concluding that the NASD lacked the authority to file an action to collect unpaid fines. 

First, it pointed out that with respect to the SEC, Congress was quite specific in setting out its authority to bring actions.  Specifically, the court looked to Section 21(d) of the Exchange Act and the “express statutory authority for the SEC to seek judicial enforcement of penalties.”  15 USC 78u.  With respect to the NASD, "Section 15A, in contrast, did not provide any mechanism for seeking judicial enforcement of the sanctions it imposed."  Said another way, the court relied on the negative implication arising from the absence of express authority. 

Second, the court divined a congressional intent not to allow actions to collect fines from the process contained in the Exchange Act.  Congress was careful to provide for an appeal to the Commission in any disciplinary proceeding brought by FINRA.  Given this, “[h]ad Congress intended judicial enforcement, it would surely have provided for some specific relief other than leaving SRO's to commonlaw proceedings in state courts or in federal district courts under diversity jurisdiction.”   

The court did note the conundrum created by the language in Section 15A that gave FINRA the authority to impose fines.  The language at least raised the possibility that Congress implicitly contemplated the ability to collect the fines imposed. The court, however, concluded that the inability to collect fines was unnecessary to ensuring enforcement of the securities laws.   

• One might argue 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, the gap does not support an inference of inadvertent omission because  significant underenforcement of the securities laws and FINRA rules is hardly the inevitable result of FINRA's inability to bring fine-enforcement actions. FINRA fines are already enforced by a draconian sanction not involving court action. One cannot deal in securities with the public without being a member of FINRA. When a member fails to pay a fine levied by FINRA, FINRA can revoke the member's registration, resulting in exclusion from the industry. Moreover, where a fine is based on a violation of the Exchange Act, the violator will also face a panoply of private and SEC remedies.

Finally, the court noted that the NASD "[s]o far as we can tell" not tried to file actions to collect unpaid fines.  This supported an inference "that NASD believed that it lacked judicial enforcement power."   Moreover, this "longstanding reliance" on other methods of enforcement was known to Congress and Congress "left that reliance unaltered."

We will critique this analysis in the next post. 

Comments

[DC Lawyer]

I look forward to your next post. Personally, I think the ruling will ultimately prove to not be particularly important. I understand FINRA rarely seeks to recover unpaid fines from brokers who have been banned from the industry. The Fiero case is apparently rather unique in this regard. If it's really a problem, I doubt the SEC and Congress would have trouble passing a bill that gave FINRA the authority. The underlying story of the Fiero Brothers is interesting though. The latest post on the site below talks a bit about the original "bear raid" though naked short selling. http://financiallyregulated.com