We are examining Fiero v. Financial Industry Regulatory Authority, 2011 U.S. App. LEXIS 20173 (2nd Cir. Sept. 29, 2011), the recent decision by the 2nd Circuit that concluded FINRA lacked the authority to file an action to collect fines imposed on members.
There are a number of aspects of the decision that call into question the reasoning used by the court. First, the case, as the court noted a number of times, depends upon congressional intent. Yet the source of that intent, the legislative history to Section 15A, was entirely unexamined. There are no references in the opinion to the hearings on the Maloney Act or the House/Senate Reports on the legislation.
Second, the opinion placed considerable reliance on the explicit authority given to the SEC to seek and collect penalties in Section 21 of the Exchange Act. But the SEC only received the authority to collect penalties in the 1980s, long after the adoption of Section 15A. See Arthur B. Laby and W. Hardy Callcott, PATTERNS OF SEC ENFORCEMENT UNDER THE 1990 REMEDIES ACT: CIVIL MONEY PENALTIES, 58 Alb. L. Rev. 5 (1994) (“The debate over whether the SEC should have the power to seek or assess civil money penalties stretches over several decades. As enacted in the 1930's, the federal securities laws relied almost exclusively on non-monetary sanctions, such as injunctions, with the possibility of criminal prosecutions for egregious violations. The Exchange Act originally contained only one civil money penalty provision, Section 32(b), which allows a penalty of $ 100 per day against an issuer that fails to file required reports. This sanction has rarely been used; as of 1990, the SEC had invoked it only once.”). While the authority in Section 21 with respect to penalties may reflect the views of Congress in the 1980s and later, it is a stretch to use the same langauge to provide insight into what Congress intended in 1938.
Third, the court relied on something akin to the reenactment doctrine. Congress knew that the NASD did not have the authority to bring actions to collect fines and never did anything to legislatively correct the matter. It is highly unlikely that Congress knew about the absence of authority. More importantly, the NASD apparently began to bring these actions after 1990. Yet Congress never stepped in to put an end to the practice, despite the adoption of SOX and Dodd-Frank. To the extent there is a proper application of the reenactment doctrine, it is to show that Congress knew the practice was taking place yet did nothing to stop it. In other words, it supports the opposite position taken by the Second Circuit.
Finally, the court put considerable weight on the ability of the NASD to collect fines through alternative mechanisms. To the extent members do not pay the requisite fines, they can be expelled from the NASD.
- FINRA fines are already enforced by a draconian sanction not involving court action. One cannot deal in securities with the public without being a member of FINRA. When a member fails to pay a fine levied by FINRA, FINRA can revoke the member's registration, resulting in exclusion from the industry.
The court, however, did not take into account that the scheme created by Congress in 1938 did not contemplate mandatory membership in an SRO. Indeed, until the the 1980s, brokers were not required to be members of an SRO. Those who were not were regulated directly by the SEC under the SECO program. Indeed, the SEC only got the right to directly regulate these brokers in 1964. See Exchange Act Release No. 9420 (Dec. 20, 1971) (“Nonmember broker-dealers are subject to the so-called "SECO program" of the Commission adopted pursuant to Sections 15(b)(8), (9), and (10) of the Securities Exchange Act of 1934 (the Act). Enacted in 1964 as amendments to the Act, these provisions empowered the Commission to establish for such nonmember broker-dealers and their associated persons supplementary regulatory procedures and rules comparable to those adopted by the NASD for its members and their associated persons.”). Only in 1983 was the SECO program discontinued and brokers made to join an SRO. See Exchange Act Release No. 20409 (Nov. 22, 1983).
To be sure, the Commission did eventually adopt a rule that provided expulsion by an SRO acted as a bar to registration under the SECO program. See Exchange Act Release No. 9290 (August 23, 1971)(proposing rule 15b8-2). But the rule was not in place until the 1970s. Moreover, the rule applied to expulsions "for conduct inconsistent with just and equitable principles of trade". Whether the nonpayment of a fine falls within this status us unclear. Finally, a member not wanting to pay the fine could avoid expulsion by resigning, thereby avoiding any action by the NASD that might trigger denial under the SECO program.
In other words, back in 1938, the ability to expel members for nonpayment had little signficance. It would not, as the court suggested, result in an expulsion from the industry. The Second Circuit instead used legislative changes adopted in the 1980s to construe legislative intent in 1938.