A federal appeals court in Manhattan ruled on Wednesday that Finra, an important regulator of Wall Street for more than 70 years, does not have the right to take its members to court to enforce its disciplinary actions.
The surprise decision curbs the powers of Financial Industry Regulatory Authority, formerly the National Association of Securities Dealers, at a time when it has been under pressure to impose greater accountability on its licensed brokers and brokerage firms.
The ruling came after a 14-year fight waged by Fiero Brothers, a tiny penny-stock brokerage firm, and its owner, John J. Fiero. In December 2000, after legal disputes that lasted several years, Finra accused Mr. Fiero and his firm of violating federal fraud statutes — specifically, engaging in a manipulative activity known as naked short-selling. Besides expelling the firm, the regulator imposed a $1 million fine.
The firm was shuttered and its owner was barred from the market — but both refused to pay the fine and, ultimately, Finra wound up in federal court trying to collect the money.
But Finra had no right to do that, according to a three-judge panel of the United States Court of Appeals for the Second Circuit, which encompasses Wall Street.
In an opinion written by Judge Ralph K. Winter Jr., the panel unexpectedly overturned a lower court and ruled that neither the nation’s foundational securities laws, adopted in 1934, nor a “housekeeping” rule adopted by Finra in 1990 gave it the right to pursue its monetary sanctions in court.
“The principal issue is whether the Financial Industry Regulatory Authority Inc. has the authority to bring court actions to collect disciplinary fines,” Judge Winter wrote. “We hold that it does not and reverse.”
T. Grant Callery, Finra’s general counsel, said the organization would “continue to review the ruling and weigh our options.” But he insisted the decision would not affect the self-regulatory group’s “ability to enforce Finra rules and securities laws, to discipline firms or protect investors.”
But some securities law experts predicted that the ruling could have both practical and psychological effects.
“The decision neuters Finra,” said John C. Coffee Jr., a securities law professor at Columbia who has been a consultant both to regulatory agencies and to private defendants appearing before them. “It has been trying to show that it has teeth and could hold its members more accountable — now, those teeth have been surgically removed.”
Martin H. Kaplan, a lawyer for Mr. Fiero and his firm, agreed that the ruling “changes the regulatory landscape in a profound way.” He said the decision vindicated those who had complained for years that Finra was exceeding its statutory power and abusing the rule-making process.
“Not only did the court find that Finra/N.A.S.D. never had authority to enforce fines using the courts, but it also highlighted Finra/N.A.S.D.’s failure to follow rule-making procedures and its frustration of Congressional intent,” Mr. Kaplan said.
At a practical level, Finra still retains its most potent weapon: the power to suspend or expel misbehaving brokers from the financial industry, what the appeals court called a “draconian” power.
But Susan Merrill, a securities lawyer and a former head of enforcement at Finra, said the decision cast an adverse light on the process Finra used to adopt the 1990 rule and, potentially, other “housekeeping” rules.
The court said the 1990 rule should have been given a more formal review, with an opportunity for public comment, because it did not deal with mere housekeeping matters. Rather, the rule “affected the rights of barred and suspended members to stay out of the industry and not pay the fines imposed on them in prior disciplinary proceedings.”
Analyzing whether other Finra rules may be affected by the decision is something “people will be wrestling with in days to come,” Ms. Merrill said.
The court’s criticism will also sting a bit at the Securities and Exchange Commission. The commission oversees Finra’s rule-making, and the chairwoman and chief executive of Finra during much of the time it pursued the Fiero case in court was Mary L. Schapiro, the current head of the commission.
The Fiero case has been a colorful one since it began in the mid-1990s, and regulators blamed Mr. Fiero and other “naked shorts” for bringing down a small clearinghouse that served 41 other small brokerage firms. Clearinghouse failures are rare and potentially dangerous, since they can greatly magnify the consequences of a single firm’s failure.
Since banned brokers cannot return to the industry unless they pay any unpaid fines, it has been extremely rare for Finra to sue to recover unpaid penalties.
Until now, both Finra and its members assumed that it had the power to do so if necessary. If it does not, its misbehaving members need no longer fear that a stiff fine will follow them into Wall Street exile.
Article source: http://feeds.nytimes.com/click.phdo?i=6afd2f7491b6c6548b49942dc81b42ac
Speak Your Mind
You must be logged in to post a comment.