RICHMOND, Va. (CN) — Fourth Circuit judges on Tuesday dismissed a challenge to the Financial Industry Regulatory Authority’s power to punish security brokers.
U.S. Circuit Court Judge Robert King, a Bill Clinton appointee, wrote on behalf of the three-judge panel that the court lacks jurisdiction because the Securities and Exchange Commission order underlying the challenge to FINRA’s enforcement powers was not final, and therefore is ineligible for appeal.
In the challenge, broker Frank Black and his Charlotte-based firm Southeast Investments claim FINRA’s power to ban and fine brokers violates the Constitution.
Itself a private authority, FINRA works on behalf of the SEC to hold brokers accountable for violating federal and trade laws. It investigated Black’s firm in 2012 and imposed sanctions and a ban in 2015, citing a failure to conduct required inspections of branch offices. In addition, FINRA claims Black attempted to cover up the lack of supervision by lying to examiners.
Southeast Investments also failed to supervise business communications by relying on an honor system for email retention, examiners found.
Black appealed his punishment to the SEC, which agreed in an order that Black failed to maintain a reasonable email supervisory system or preserve certain emails and kept the fines imposed for those violations. The commission remanded the ban and the rest of the violations further proceedings, however, after it determined that FINRA’s failure to preserve investigatory notes was not a harmless error.
Black argued that an Article III court, which handles cases arising from federal law, must rule when constitutional issues are present while FINRA contends that, as a private entity, it is not subject to constitutional arguments.
Private self-regulatory organizations, FINRA claims, can exercise a primary supervisory role over their members under the Securities Exchange Act, subject to comprehensive commission oversight. The act requires anyone seeking to sell securities to join an association of broker-dealers registered as a national securities association or to associate themselves with a member.
Ultimately, Judge King determined that his federal court wasn’t the proper venue to settle the issue.
He found that the SEC’s decision was not final, noting that final order ends the litigation on the merits and leaves the court to execute the judgment.
“Our court has routinely concluded that we lack jurisdiction to review an agency order remanding a case, or a portion thereof, to a lower tribunal for further proceedings,” King wrote.
The judges quashed Black’s argument pointing to the Ninth Circuit’s decision in Saliba v. SEC to exercise final order jurisdiction over part of an SEC decision, which also included a partial remand order. Unlike Black’s case, King found, the SEC in Saliba imposed an immediately effective bar on FINRA membership. King said the Ninth Circuit equated the bar to an injunction subject to an interlocutory appeal.
“In contrast, the sanctions imposed against Black and Southeast for the supervisory and email retention violations were not immediately effective, and they do not in any way resemble an injunction,” King wrote.
According to King, the SEC decision in Black’s appeal requires further proceedings that could develop the record through witness testimony and cross-examination.
“Black and Southeast will thus be entitled to challenge FINRA’s decision in such further proceedings — along with the sanctions for the supervisory and record retention violations — by an appeal to the SEC and then, if necessary, to this court,” King wrote.
During oral argument, attorneys representing Black argued that although Black is not subject to fines or bans until FINRA has completed its remanded proceedings, there is no set timeline for those proceedings, leaving Black in limbo.
The dismissal means the court must wait for another case to analyze whether FINRA’s authority violates the Constitution.
Two Barack Obama appointees, U.S. Circuit Court Judges Andrew Wynn and Stephanie Thacker, completed the three-judge panel.
The SEC and FINRA declined to comment, and Black and his attorney failed to respond to a request for comment.