Last week, word spread about a legal challenge that has been mounted in federal court against FINRA’s ability to enforce violations of the Securities Act of 1933, and, perhaps not surprisingly, it has generated a lot of talk, not to mention enthusiasm (at least among those who chafe at FINRA’s aggressive Enforcement mentality). The specifics of the case are wonderful in their simplicity: according to the ancient statutes that enable FINRA to serve as a self-regulatory organization, it is expressly allowed to enforce its own rules, as well as violations of the Securities Exchange Act of 1934. But, the clear and unambiguous language of the statutes do not say a word about the Securities Act. Accordingly, the argument goes that Congress, the drafters of the statutes, deliberately withheld from FINRA the power to bring Enforcement cases for Securities Act violations; otherwise, Congress would have said something about it.
I do not interpret statutes for a living, but I do recall very well from law school that the legislature is presumed to intend what it says when it uses clear, unambiguous language in a law. Thus, if the statutes do not expressly give FINRA jurisdiction to enforce Securities Act violations, there is no reason to believe that such power was ever intended.
As I said, simple and compelling.
Equally interesting, and disturbing, is FINRA’s response to the argument: that even if it does not have the statutory mandate to bring cases for Securities Act violations, it can do so nevertheless by virtue of Conduct Rule 2010. You know Rule 2010, FINRA’s catch-all ethical rule that requires member firms and associated persons to obey “high standards of commercial honor and just and equitable principles of trade.” When FINRA does not have a specific rule prohibiting a particular variety of misconduct, it simply charges a 2010 violation. So, according to FINRA, even if it is not permitted to charge Securities Act violations, it can still enforce the underlying activity simply by calling it a 2010 violation.
But, this is pretty bold stuff, and it is hardly clear that FINRA will prevail. FINRA exists because the U.S. Congress, following the crash of 1929, when deciding what to do to avoid a potential recurrence, elected to regulate the securities industry not directly, but, rather, indirectly, with self-regulatory organizations serving as the first line of defense (backed up by the government in the form of the SEC). But, SROs are not given carte blanche. They may do only what Congress permitted them to do, and what the SEC subsequently allows through rule-making. No one would argue, for instance, that FINRA is permitted to subpoena documents from customers, or compel them to testify, because it is not statutorily empowered to do so. It may want to be able to do so, from time-to-time, to aid it in its examination process, but that is irrelevant; FINRA can only compel BDs and individuals associated with BDs to produce documents, or to appear and testify.
Similarly, FINRA may want to be able to bring Securities Act cases, but if it lacks that power as a result of a decision that Congress made decades ago, when SROs were first authorized, its insistence that somehow Rule 2010 trumps that Congressional mandate would seem to ring rather hollow.
So, it will be fascinating to see how this plays out in court. And this is more than a mere academic exercise, or a rare opportunity to enjoy watching FINRA squirm. FINRA has brought, and still regularly brings, lots and lots of Section 5 cases, i.e., cases alleging illegal unregistered distributions of securities. If FINRA’s ability to bring such cases is successfully challenged, then it will be strictly up to the SEC to enforce Section 5. And, what about all the cases that FINRA has already filed, that have already been settled, or tried? If FINRA never had the jurisdiction to bring those cases, will all those results be magically vacated?
Keep an eye on this one!
 Ok, 1938, the year the Maloney Act was passed, may not be ancient. But, still, it is a long time ago.