The U.S. Court of Appeals for the Second Circuit held that the Financial Industry Regulatory Authority lacks the authority to bring court actions to collect disciplinary fines it has imposed on its members.
In 2000, FINRA’s predecessor (the NASD) found that member firm Fiero Brothers had violated Section 10(b) of the Securities Exchange Act of 1934. The NASD revoked Fieoro’s member status and fined John Fiero, the firm’s sole representative, $1 million plus costs. After Fiero refused to pay the fine, FINRA commenced a breach of contract action in New York State court, alleging that Fiero had contractually agreed to pay any disciplinary fines when he signed the NASD registration forms. The New York Court of Appeals dismissed the case for lack of subject matter jurisdiction, and the case was re-filed in federal court.
Noting that the Exchange Act sets forth in detail the powers and rights of self regulatory organizations (SROs) such as FINRA, the Second Circuit found that the Exchange Act does not authorize SROs to bring civil enforcement actions to collect fines imposed on member firms.
In dismissing FINRA’s claim, the Second Circuit also found that a 1990 rule adopted by the Securities and Exchange Commission announcing NASD’s intent to “seek to reduce such fines to a judgment” was not promulgated under proper procedures and was therefore invalid. The rule sought to change the existing authority for SROs and thus required a notice and comment period, as well as affirmative SEC approval, before becoming effective. Because Congress never intended that FINRA be able to pursue its fines in court, and because the 1990 rule did not effectively grant FINRA that power, its claims were dismissed.
Fiero v. Financial Industry Regulatory Authority, Inc., Nos. 09-1556-cv(L), 09-1863-cv(XAP), 2011 WL 4582436 (2d Cir. Oct. 5, 2011).