Wall Street’s self-regulator tried to ban Alpine Securities Corp. from the industry after finding that it jacked up fees on customers by 60,000% and violated a cease-and-desist order 35,000 times.
But the Utah-based brokerage firm isn’t going quietly.
Alpine not only fought back against the Financial Industry Regulatory Authority’s ruling, but won a court injunction keeping the company in business during an appeal that challenges the organization’s underlying power.
Alpine, which expects to argue its appeal early next year, claims Finra wields the power of a government agency but doesn’t operate with the same constitutional constraints and accountability. Since the injunction, at least three other brokers have challenged Finra’s constitutionality in court.
Self-regulatory organizations are the latest target of US conservatives pushing to dismantle big government. The issue, which the Supreme Court may need to resolve, could threaten a web of SROs that the US government uses to help oversee broad swaths of the economy from finance to horse racing to the electric grid.
“If the courts hamstring Finra, it will mean the beat cop isn’t able to crack down,” said Benjamin Edwards, a law professor at the University of Nevada, Las Vegas, who submitted a brief in support of Finra.
Finra regulates thousands of firms by crafting rules, conducting exams and imposing sanctions for bad behavior. Overseen by the Securities and Exchange Commission and authorized by Congress, Finra helps fund its activities through membership dues and fines. Last year, it barred or suspended 555 brokers and levied $54.5 million in fines.
The Supreme Court has been whittling away at the power of federal agencies and is currently considering a case that challenges the SEC’s ability to use in-house judges. Other private regulators, including the Public Company Accounting Oversight Board, which oversees corporate audits, and the Horseracing Integrity and Safety Authority, which was created following a flood of doping incidents and horse injuries, are also facing similar court challenges.
Disastrous Consequences
An Alpine win could have impact far beyond Finra. Some of the more than forty other SROs that oversee trading of stocks, futures, options and municipal bonds warn in court briefs of disastrous consequences for the financial markets and investors if they are stripped of their power.
Clearing houses, for example, could have trouble collecting collateral from banks or brokers to protect against defaults. Exchanges, which can quickly halt trading to protect investors when news that moves stock prices leaks, warn that oversight of securities markets could be “destabilized.”
Alpine’s attorney Brian Barnes dismissed the warnings as “scare tactics,” and said a win by his client wouldn’t lead to the abolition of Finra. The company is arguing that Finra violated the Constitution by improperly appointing hearing officers and infringing on certain protections such as the right to a trial by jury. One way to help resolve the problem would be for the SEC to take over authority for appointing and removing Finra’s hearing officers, Barnes said.
Finra contends that as a private agency it isn’t subject to constitutional requirements and is adequately supervised by the SEC, which reviews its cases on appeal.