Is FINRA on the ropes?

The Financial Industry Regulatory Authority has faced criticism from the securities industry it regulates ever since it was formed in 2007 by the merging of NASD and NYSE Regulation, Enforcement, and Arbitration. And an ongoing lawsuit that targets the self-regulatory organization’s authority to expel broker-dealers could eventually erode its powers.

FINRA oversees and regulates 3,298 firms and 628,392 registered reps, or financial advisors. Although it is not a governmental agency, it operates under the aegis of the Securities and Exchange Commission.

The current legal challenge by a broker-dealer to FINRA’s authority is the latest in a line of public setbacks involving the regulator, which has also seen a steady decline for more than a decade in the number broker-dealers it regulates, as the industry steadily moves to the registered investment advisor side of wealth management.

RIAs operate under a fiduciary standard of care and are regulated by the SEC and states.

FINRA has the power to levy fines and, in serious cases, bar broker-dealers and individuals from the industry. If you want to be a broker or operate a brokerage firm, you must join FINRA. FINRA wields enormous power over the lives of brokers and broker-dealers.

The US Court of Appeals for the District of Columbia issued the first successful blow to FINRA’s enforcement power in Alpine Securities Corp.’s lawsuit against it.

In 2022, FINRA sanctioned Alpine Securities, which has been open for business since 1984, for violating industry rules, and issued a cease-and-desist order against the firm. Alpine, which is based in Salt Lake City, then sued the regulator.

According to Bloomberg News, a panel sided with Alpine Securities 2–1 on November 22, finding that FINRA’s expedited proceeding against the broker-dealer would allow “FINRA to expel Alpine with no opportunity for SEC review,” which likely violates the private nondelegation doctrine.

In other words, FINRA cannot expel Alpine Securities without a review by the SEC, a direct blow to the regulator’s authority.

“In issuing this narrow decision, which applies only to FINRA-expedited proceedings, the court declined to address many of Alpine’s broader and more consequential constitutional arguments,” Bloomberg News reported. “These open issues will now be litigated in the lower court and, if successful, could severely limit FINRA’s securities enforcement authority.”

“This lawsuit ultimately could be an issue for the Supreme Court to sort out,” said Louis Tambaro, an industry lawyer. “But FINRA is likely to see more challenges like this, particularly pertaining to its authority.”

A FINRA spokesperson noted that the court of appeals did not resolve the merits of any of Alpine’s constitutional challenges and does not limit FINRA’s day-to-day work.

“The court emphasized instead that its decision was limited to the SEC review of a specific type of expulsion proceeding,” the spokesperson said.

Along with the Alpine Securities decision, FINRA is now a regulator in Washington in an era when the administration of President Trump favors curbing the power of such organizations.

Project 2025 – published by long-running FINRA foe the Heritage Foundation – a blueprint for the Trump presidency, calls for the self-regulator to be done away with.

Financial regulators, particularly the SEC and FINRA, “are poorly managed and organized,” Project 2025’s playbook reads. “With regulatory authority delegated by the government, both the Public Company Accounting Oversight Board and FINRA have proved to be ineffective, costly, opaque, and largely impervious to reform.”

“To reduce costs and improve transparency, due process, congressional oversight, and responsiveness, PCAOB and FINRA should be abolished, and their regulatory functions should be merged into the SEC,” Project 2025 concludes.

The Alpine Securities case, along with the declining number of broker-dealers, has FINRA on the ropes, some industry observers said.

“For quite some time, brokers have been leaving broker-dealers under FINRA to work as RIAs or as a hybrid investment advisor,” said Brad Bennett, former head of enforcement at FINRA and now an industry legal consultant. “That’s a decline. FINRA has no authority over RIAs. They’re regulating a melting ice cube.”

FINRA has weathered blunders and shortfalls in its past, although not as potentially severe as the Alpine Securities matter.

In March 2012, former FINRA CEO Richard Ketchum issued a public mea culpa for the regulator’s failure to uncover R. Allen Stanford’s alleged $8 billion Ponzi scheme.

“FINRA clearly could have done better, and we deeply regret we did not,” Ketchum said in prepared testimony to the House Financial Services Committee’s Subcommittee on Oversight and Investigations.

Meanwhile, FINRA clearly has its supporters, who are warning of dire consequences regarding the Alpine Securities claim.

“Alpine Securities Corp. threatens to upend financial markets by eliminating a critical market regulator that cannot be replaced by a government actor,” wrote Benjamin Edwards, Professor of Law at the William S. Boyd School of Law, University of Nevada, Las Vegas, in an amicus brief. “A judicial ruling invalidating FINRA wholesale would inflict enormous damage on financial markets and could even cause a financial crisis. Existing government agencies simply lack the ability to replace FINRA’s keystone role.”