A U.S. Circuit Court of Appeals today ruled that the
Financial Industry Regulatory Authority Inc. has no right to collect fines through court judgments.
In a rule change effective in 1990, Finra — then known as the NASD — began using debt collectors and court judgments to get money owed from disciplined broker-dealers and registered representatives who refused to pay.
But the 2nd U.S. Court of Appeals ruled today that
Financial Industry Regulatory Authority Inc. had no power to seek judicial judgments.
“We conclude that the heavy weight of evidence suggests that Congress did not intend to empower Finra to bring court proceedings to enforce its fines,” the appeals court wrote in its decision.
The three-judge panel said the 1990 rule change was not properly promulgated under the Securities Exchange Act of 1934, which requires notice and comment for substantive rule changes.
Instead, the NASD submitted the rule to the Securities and Exchange Commission as a “housekeeping” item, the court said. Such rules become effective upon filing with the SEC.
“Essentially, the court said the NASD had no right to bring any action to court to collect fines, and that it failed to follow its rule-making process,” said Marty Kaplan, a partner at Gusrae Kaplan Bruno & Nusbaum PLLC, who represented the broker-dealer involved in the case, Fiero Bros. Inc.
The case stems from a 1998 enforcement action brought by the NASD against Fiero Brothers Inc. In 2000, an NASD hearing panel found that the firm had engaged in illegal short selling and market manipulation. It expelled Fiero Brothers and fined it $1 million plus costs.
The firm refused to pay, and the NASD pursued the matter in a long series of court battles, with both New York and federal courts upholding Finra's right to collect judicial judgments.
But those decisions were overturned by the appeals court decision today.
Mr. Kaplan said Finra's only option now would be to appeal to the Supreme Court.
“We will continue to review the ruling and weigh our options," said Finra spokeswoman Nancy Condon in an emailed statement.
Ms. Condon said the decision would not impact Finra's ability to enforce its rules.
