The Second Circuit Court of Appeals has ruled that the Financial Industry Regulatory Authority (“FINRA”) cannot seek to enforce a monetary fine through a judgment with the court. What does this mean for broker-dealers?
In 1998, NASD, FINRA’s predecessor, brought an enforcement proceedings against a broker-dealer. After a hearing, a panel concluded that the firm engaged in illegal short selling and market manipulation. It expelled the broker-dealer and imposed a fine. After the firm refused to pay the fine, FINRA pursued the fine through the federal court, which upheld FINRA’s right to collect its fines through a judgment against the broker-dealer.
On appeal, the Second Circuit determined that Congress did not intend to authorize FINRA to enforce its fines through judicial proceedings. If FINRA wanted the ability to do so, FINRA would have to have pursued proper rule-making, which it failed to do. FINRA has stated that it is weighing its options, which would include an appeal to the Supreme Court.
This decision is significant in as much as FINRA is without judicial process to enforce a fine against a broker-dealer who refuses to pay, but this does not mean that FINRA is without recourse. First, FINRA will, in all likelihood, will attempt to pursue rule-making to enable it to seek judicial relief. Second, FINRA has the threat of additional sanctions against member firms for failing to pay a fine, such as the ultimate sanction of expulsion; a sanction that the panel already imposed in this case. As such, the absence of judicial recourse should not provide broker-dealers with a rationale for not paying a fine. If you do, you may wind up being much worse off.