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The lawsuit that could kill Wall Street’s industry regulator

By SAM SUTTON 08/17/2023 08:00 AM EDT

The Financial Industry Regulatory Authority tried to expel Alpine Securities from the securities market over allegations that it misused customer funds and violated basic compliance rules.

Now, the Utah-based broker has unleashed a legal battle against FINRA that could dismantle the authority of powerful self-regulatory industry groups that back up Washington regulators.

“It’s not just about FINRA, it’s about the entire self-regulatory organization regime. It’s illegal — period,” American Securities Association President and CEO Chris Iacovella, who represents regional wealth advisers and financial services firms, told your host.

FINRA acts as Wall Street’s industry-governed gatekeeper; licensing brokers, conducting market surveillance and levying penalties when institutions or investment professionals break the rules. Those activities have long been blessed by federal securities law and are conducted under SEC oversight.

Alpine denied Finra’s allegations and, earlier this summer, the firm was granted an injunction by a federal court that blocked its expedited “death sentence” pending appeal. In an accompanying opinion, D.C. Circuit Judge Justin Walker questioned whether FINRA actually has the authority to determine Alpine’s fate, contending that the organization’s hearing officers — who aren’t government employees — could present a “constitutional problem” because they aren’t members of the executive branch.

“From start to finish, FINRA hearing officers execute government laws subject to a government plan, with little to no room for private control,” wrote Walker, a Trump appointee and Brett Kavanaugh protégé who has been a leading proponent of paring back powers afforded to federal regulators.

Similar arguments have already been used to chip away at enforcement mechanisms at the SEC and FTC. If the court eventually follows Walker’s opinion and rules in favor of Alpine, it would jeopardize FINRA’s ability to carry out its responsibilities.

It would also upend similar powers held by self-regulatory organizations across the securities, transportation, energy and health care industries, FINRA’s Gibson Dunn attorneys wrote in a filing. On Wall Street, that could include national securities exchanges like Nasdaq and NYSE.

It would amount to a “seismic shift in state action jurisprudence,” wrote Gibson Dunn’s Amir Tayrani, Alex Gesch and Max Schulman. Other law firms have also issued memos noting the potential implications for other industry groups.

Still, Alpine’s legal team says that their real target is FINRA’s authority, and that the impact on other self-regulatory organizations might be overstated.

“FINRA’s enforcement power is really unique. The lines that have to be drawn here aren’t always easy to draw,” said Brian Barnes of the law firm Cooper & Kirk, which is one of the firms representing Alpine. “There’s a tendency on the other side to engage in a sort of hyperbolic, sky-is-falling rhetoric.”

A ruling isn’t expected until next year. In the meantime, “FINRA looks forward to the hearing before the D.C. Circuit Court of Appeals in this matter,” the organization said in a statement sent by spokesperson Rita De Ramos. “FINRA believes it has strong defenses to the claims being made.”

Walker did not respond to a request for comment.


https://www.politico.com/newsletters/morning-money/2023/08/17/the-lawsuit-that-could-kill-wall-streets-industry-regulator-00111572