There have been some developments this week in a few matters on which I have previously offered my views. To help you stay on the cutting edge of financial world current events as you mingle at your upcoming Cinco de Mayo fiestas, here are three updates. Two, not surprisingly, represent wins for the regulators. The third, however, offers a ray of hope for all my fellow doubters.
FINRA beats back a challenge in court. A few weeks ago, I reported on what I thought was a clever and compelling legal challenge that had been raised by a broker-dealer, Scottsdale Capital Advisors, to FINRA’s ability to bring Enforcement actions based on violations of the Securities Act of 1933. According to the argument, in none of the statutes that empowers FINRA to bring Enforcement cases is any language that expressly imbues FINRA with authority to enforce violations of the Securities Act. As a result, FINRA should not be able to file complaints based on perceived Securities Act violations. Simple, logical, compelling.
FINRA opposed the challenge, of course, and filed a motion to dismiss the complaint. The SEC even jumped in, too, filing an amicus brief in support of FINRA. FINRA made a number of arguments against Scottsdale, including (1) FINRA Conduct Rule 2010 is broad enough to include Securities Act violations, regardless of what the statutes say or don’t say, (2) Scottsdale jumped the gun by filing in court, and should be required first to exhaust its administrative remedies, and (3) FINRA is immune from such lawsuits anyway.
Oral arguments were held this week, and the Federal District Court Judge who heard them granted FINRA’s motion to dismiss the complaint. Shocking news, right? In her ruling from the bench following the arguments, the judge concluded that before Scottsdale can go to court to challenge FINRA’s jurisdiction, it first has to run the gamut of fighting it out at FINRA – which means a hearing before the hearing panel, and then an appeal to the NAC, i.e., the National Adjudicatory Council – and then the SEC before filing in court. In other words, Scottsdale has to wage battle three separate times (over many years, at the cost of ridiculous legal fees) before it can even raise its argument to a judge that FINRA exceeded the scope of its statutorily mandated jurisdiction. FINRA, it seems, not Elliot Ness, is the real “untouchable,” as nothing can prevent its Enforcement machine from grinding on, even in the absence of legal authority.
The Supreme Court isn’t interested – yet – in the challenge to SEC ALJs. We have also discussed, more than once, the SEC’s increased use of administrative proceedings (rather than court cases) to bring its Enforcement actions. (Why? Because the SEC wins almost all the time when it files there. I mean, you can’t blame them, right?) Well, several court cases have been filed attacking the constitutionality of the manner in which SEC Administrative Law Judges, or ALJs, who are actually employees of the SEC, are appointed to their positions. Perhaps surprisingly, or at least interestingly, some federal judges (in Georgia and New York) have entertained these arguments, and have even suggested that they may, ultimately, find the arguments to be valid. On the other hand, federal judges in other jurisdictions (the D.C. and Seventh Circuit Courts of Appeals) have rejected these same arguments.
What happens when federal judges from around the country disagree on things? At least some of the time, the U.S. Supreme Court will deign to hear a case on the subject, thereby breaking the tie. Well, not here. This week, for the second time, the Supreme Court – which has discretion whether or not to grant certiorari to hear an appeal – declined even to consider whether the SEC’s ALJs are constitutional or not. At least not yet. The Court may decide at some later date, when more Circuit Courts weigh in on the issue, to hear a case, but that remains to be seen. In the meantime, then, there is a hodgepodge of rulings out there, some favorable to the SEC, some not. But, unless and until the Supreme Court takes up one of these cases, it appears that the SEC will continue its use of administrative proceedings unabated, as it tries to recreate the perfect record that it achieved in such proceedings back in 2014, winning all six litigated APs.
FINRA’s Debt Research Rule Delayed. Finally, last year, I wrote about FINRA’s new Rule 2242, which extends to debt securities many of the existing rules governing research analysts who cover equities. Rule 2242 was supposed to go into effect in February 2016, but, “[i]n response to industry questions regarding implementation of the requirements of Rule 2242,” FINRA delayed implementation of the new rule until April 22, 2016. Just two days before the scheduled effective date, FINRA announced that it “continues to receive questions regarding implementation of the requirements of Rule 2242,” and, “to give members additional time to implement the requirements of Rule 2242,” it has extended the implementation date again, now until July 22. Why the hubbub? What are these burning questions that the industry is posing to FINRA? Well, that’s not clear, as FINRA has not released them.
The good news, however, is that back in March, FINRA did release on its website updated FAQs about the research analyst rules that incorporate some questions and answers about the new debt security rule. And I am very ok with this. I am always pleased when FINRA gives the industry additional time to deal with the implementation of new rules, especially rules that will, for certain firms, create big changes in how they do business. It also makes me happy when FINRA releases guidance on new rules before those rules become effective, thus reducing the opportunity for me (and others) to complain that FINRA would rather play “gotcha” after the fact than proactively help its members avoid problems. I am hardly saying that FINRA is always fair, or even mostly fair; here, however, I cannot complain.
 It’s a pretty technical argument, but it boils down to whether the US Constitution requires the ALJs to be appointed by the Commissioners themselves, rather than some lesser authority at the SEC.
 Theoretically, anyway. If a ninth Justice isn’t confirmed soon, the Supreme Court itself may not be able to accomplish anything, given that four-four ties are entirely likely.