Federal Appeals Court Decision May Undermine FINRA’s Authority

According to a ruling by the U.S. Court of Appeals for the Second Circuit, FINRA cannot enforce disciplinary actions by taking its members to court. The court’s decision comes after a long legal battle against Fiero Brothers, a penny stock brokerage firm, and John J. Fiero, the firm’s owner. In 2001, FINRA ordered Fiero and Fiero Brothers to pay a $1 million fine for naked short selling and other fraud statute violations. However, Fiero and Fiero Brothers refused to pay the fine imposed in securities arbitration.

When Fiero and Fiero Brothers failed to pay the fine, FINRA took them to court. New York’s state court eventually ruled in FINRA’s favor, but the case was then taken to federal court by Fiero. Fiero attempted to get a declaratory judgment stating that pursuing the fine in court was not within the power of FINRA. Next, FINRA counter-sued.

FINRA’s 1990 housekeeping rule gives it the right to attempt to get monetary sanctions in court. But the federal appeals court ruling is now saying that the housekeeping rule and the foundational securities laws do not give them the right to use the court system to claim disciplinary fines. This ruling overturns the lower New York state court’s decision. The court also asserted that the housekeeping rule should be more formally examined.

Collecting fines is normally not a problem for FINRA, because brokers that have been banned are not allowed to reenter the securities industry until all fines have been paid. Some are worried, however, that if FINRA doesn’t have the right to pursue non-payees in court, this will undermine their authority and cause other brokers to refuse to pay fines.

FINRA officials maintain that this incident will not permit it to enforce FINRA rules, securities laws or maintain its current level of ability to discipline financial firms. FINRA has been able to pursue fines in court for two decades.