The Financial Industry Regulatory Authority (Finra) does not have the authority to ask for court orders demanding that fines it has imposed be paid, according to a ruling by the U.S. Second Circuit Court of Appeals.
The ruling involves a years-old case in which Finra fined Fiero Brothers Inc. and John J. Fiero $1 million plus costs for engaging in illegal short selling and market manipulation. The firm refused to pay the fine and eventually Finra (then known as NASD, or the National Association of Securities Dealers) filed a petition in state court in New York demanding the fine be paid. Finra expelled Fiero Brothers from membership, thereby barring them from doing business.
After a lengthy legal battle involving conflicting court decisions, the Circuit Court of Appeals ruled Wednesday that Finra has no jurisdiction to use judicial action to collect fines. The case stems from action taken by NASD in 1998 and decided in 2000.
Finra justified its right to seek a judicial order to collect the fine by saying it had changed its rules in 1990 to allow such action. The Circuit Court concluded that the rule-making procedure was not followed correctly. In addition, it ruled Finra decisions can be appealed to the SEC if an entity disagrees with a fine.
Also, the ruling said that "Finra fines are already enforced by a draconian sanction not involving court action." Finra can revoke a member's registration from the organization and a firm cannot deal in securities without being a member of Finra, thereby they are barred from the industry, the court says. In addition, the violator will face a "panoply of private and SEC remedies."
Brian Rubin, a securities lawyer for Sutherland Asbill & Brennan in Washington, said the practice of trying to collect fines through court action has been declining. Currently, brokers who are suspended and fined are not allowed to return to the industry unless they pay the fine.
T. Grant Callery, general counsel for Finra, said, "We will continue to review the ruling and weigh our options. The decision will not have any impact or restrict our ability to enforce Finra rules and securities laws, to discipline firms or to protect investors."