Litigation: Is FINRA still fine?

A recent 2nd Circuit decision could significantly impact small and medium size broker-dealer firms.

On Oct. 5, 2011, the 2nd Circuit held in Fiero Brothers v. FINRA that the Financial Industry Regulatory Authority (FINRA) lacks the power to sue its members to collect fines it imposes in disciplinary proceedings. The decision arose from FINRA’s suit against the Fiero Brothers securities firm to recover a $1,000,000 fine.

On Feb. 6, 1998, the National Association of Securities Dealers (NASD) initiated disciplinary proceedings against Fiero Brothers for violating Section 10(b) of the Exchange Act, Rule 10b-5, and FINRA Conduct rules. The NASD both expelled Fiero Brothers and fined it $1,000,000 plus costs. Fiero refused to pay the fine and FINRA commenced an action in New York Supreme Court to collect the funds.

But the 2nd Circuit predicated Fiero on more than negative implications. Disciplined FINRA members can appeal their punishments to the SEC and thereafter to the Court of Appeals. The court reasoned that, had Congress intended that FINRA use courts to enforce its fines, it would have said so. Further, Congress gave federal courts exclusive jurisdiction to enforce the Exchange Act.

FINRA’s breach of contract theory of recovery, which would often play out in state courts, undermines that exclusivity by calling on state courts to analyze and enforce Exchange Act provisions.

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Matthew Ingber

Matthew Ingber is a litigation partner at Mayer Brown.

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