Friday, November 03, 2017

No private right to sue FINRA for violations of its own rules

By Rodney F. Tonkovic, J.D.

An Eleventh Circuit panel has affirmed the dismissal of a complaint brought against FINRA for lack of a private right of action. The subject of FINRA disciplinary proceedings brought a number of tort claims against FINRA in a state court. The panel affirmed the district court's conclusion that removal to federal court was proper because a suit against FINRA for violating its own rules arises under the Exchange Act (Turbeville v. Financial Industry Regulatory Authority, November 1, 2017, Tjoflat, G.)

FINRA proceedings. Anthony Turbeville was a registered representative of a FINRA-affiliated broker. In 2009, FINRA filed a complaint alleging that Turbeville fraudulently recommended that elderly, unsophisticated buyers purchase certain collateralized mortgage obligations. A FINRA hearing panel barred Turbeville from association and assessed restitution and adjudication costs against him; FINRA's National Adjudicatory Council later affirmed this decision.

While the appeal to the NAC was still pending, Turbeville filed a defamation suit in Florida state court against the investors who had testified against him during the FINRA proceedings. A FINRA investigation concluded that there was cause to institute another disciplinary proceeding because Turbeville had violated FINRA rules against retaliatory action intended to influence ongoing FINRA proceedings. At the time FINRA issued its Wells notice regarding the investigation, Turbeville was not a member of a FINRA-affiliated firm and no longer worked in the industry. Turbeville disputed the investigator's findings and the Wells notice was removed from his BrokerCheck report.

Turbeville then filed suit against FINRA in the Florida state court, asserting that the investigation of the suit against his former clients exceeded FINRA's authority and jurisdiction under its own rules. He sued for defamation, abuse of process, intentional interference with a prospective advantage, and conspiracy.

District court dismisses. FINRA removed the suit to the federal district court and filed a motion to dismiss. The court determined that Turbeville's suit was a challenge to FINRA's application of its own rules, which were promulgated under the Exchange Act's grant of authority. So, a substantial federal question existed, and Turbeville's motion to remand was denied. The court then dismissed Turbeville's claims, concluding that FINRA had absolute immunity from liability in the exercise of its regulatory functions and that there was no private right of action for damages against FINRA.

Affirmed. The appellate panel affirmed. Removal to federal court was proper, the panel said, because a suit against FINRA for violating its own rules arises under the Exchange Act and thus falls within the Act's grant of exclusive jurisdiction to the federal courts. The panel also confirmed that no private right of action exists for members of self-regulatory organizations to sue the SRO for violating its internal rules.

Regarding the jurisdictional issue, the panel noted that while Turbeville's complaint invoked state tort law, it was on its face a challenge to FINRA's application of its internal rules in exercising its regulatory authority. The complaint's causes of action rested mainly on allegations that FINRA violated its own rules and exceeded its jurisdiction. To address the complaint, the court would necessarily have to interpret FINRA's rules and regulations, which are promulgated according to the Exchange Act's mandates. The interpretation of FINRA's rules, then, unavoidably involves answering federal questions, the panel said.

The panel then concluded that Turbeville's claim was properly dismissed because there is no private right of action for plaintiffs looking to sue an SRO for violations of its own rules. The panel noted that the Exchange Act is silent as to the existence of a private right of action, and the internal appeals and administrative-review processes created by the Exchange Act confirm further that no private right exists. Allowing an action like Turbeville's would, the panel remarked, authorize fifty state courts to supervise FINRA's conduct through the vehicle of state tort law. Ultimately, the panel stated, while the prescribed remedies might not fully assuage the reputational harm claimed by Turbeville, he chose to accept those limitations by affiliating himself with an SRO-governed firm.

The case is No. 16-11083.

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