Tuesday, April 25, 2017

High court declines petition on jurisdiction to hear challenges to FINRA disciplinary actions

By Rodney F. Tonkovic, J.D.

The Supreme Court has denied certiorari for a petition on the issue of a court’s jurisdiction over challenges to the statutory authority of a regulatory body. The petition, filed by a FINRA-registered broker-dealer, asked the Court to consider whether Congress intended to restrict federal district courts from hearing FINRA challenges involving alleged violations of the Securities Act (Scottsdale Capital Advisors Corporation v. Financial Industry Regulatory Authority, Inc., cert. denied April 24, 2017).

Scottsdale Capital Advisors Corporation and three of its officers are the subjects of an ongoing disciplinary proceeding before FINRA. The firm was charged in 2015 with violating FINRA Rule 2010 based on the liquidation of over 74 million shares of unregistered stocks in violation of Securities Act Section 5. After its motion for summary disposition was rejected by the FINRA Hearing Panel, Scottsdale brought an action asserting that FINRA was foreclosed by the text of its enabling legislation to bring disciplinary action based on violations of any law other than the Exchange Act. The district court, in a one-page order, dismissed the case based on lack of subject matter jurisdiction.

Fourth Circuit decision. On appeal, the Fourth Circuit affirmed the dismissal, finding that FINRA's interpretation of its authority to charge members with violations of the Securities Act was plausible and that the Exchange Act provides for meaningful judicial review. As a result, the panel said, FINRA's actions did not fall within a narrow exception that grants a court jurisdiction when an administrative body acts outside of its statutory authority

Free Enterprise. The petitioners primary argument was that appellate courts have misinterpreted the Court’s holding in Free Enterprise Fund v. PCAOB (2010). In Free Enterprise Fund, the Court held that the Exchange Act’s administrative review scheme did not deprive district courts of subject-matter jurisdiction over a challenge to the legality of the regulatory body at issue. Scottsdale maintained that in this case, the Fourth Circuit held that this same review scheme blocks jurisdiction when an administrative proceeding is pending when the challenge is made.

This, the petition argued, renders Free Enterprise Fund a virtual dead letter by limiting it to cases where no administrative proceeding is pending or threatened. In this respect, the petition notes, the Fourth Circuit’s decision is similar to that of the Second Circuit in Tilton v. SEC, holding that Tilton must first await an adverse final SEC order before petitioning for review on constitutional grounds. As stated by the dissent in Tilton, by the time there is a final order, and the day for judicial review comes, the petitioner will have already suffered the injury it is trying to prevent. The petitioner declared that whether or not an administrative proceeding is pending is "a distinction without a difference" and unjustly narrows Free Enterprise Fund's holding. The petition asked that the Court grant the petition (or hold it pending the outcome of Tilton) to confirm that the holding of Free Enterprise Fund "retains real meaning."

The petition argued further that Fourth Circuit’s decision violated a Free Enterprise Fund element involving the claims at issue being wholly collateral to the Exchange Act's review provisions. The petitioner contested FINRA's statutory authority to prosecute disciplinary actions premised on violations of the Securities Act, and not FINRA's interpretation of a substantive securities law. Scottsdale's claim, the petition said, was plainly not one that Congress intended FINRA to resolve for itself in an administrative proceeding.

Finally, the petition asserted that Scottsdale's claims were outside of FINRA's expertise. The governing statute here, the Securities Act, unambiguously gives the SEC, and the SEC alone, authority to enforce it and, therefore, FINRA has no statutory authority to prosecute Scottsdale for alleged violations of that Act. The Exchange Act is the only statute that Congress gave FINRA the authority to enforce and, therefore, the only statute over which FINRA is deemed to have expertise, the petition contended.

The petition is No. 16-1124.

No comments: