FINRA, the brokerage industry’s self-regulatory organization, faces a lawsuit challenging the constitutionality of its enforcement and arbitration system.
Filed on July 10, this complaint follows a recent U.S. Supreme Court decision that significantly limited the SEC’s internal judicial system. The lawsuit adds to the legal pressures on FINRA, a non-governmental entity overseen by the SEC.
Broker D. Allen Blankenship, who brought the case, contends that FINRA’s disciplinary process infringes on his Seventh Amendment right to a jury trial.
FINRA’s disciplinary action against Blankenship involves accusations of unsuitable short-term trading of mutual funds, allegedly inconsistent with his clients’ objectives. FINRA claims Blankenship earned approximately $16,000 in commissions from these trades, which he allegedly structured to evade his firm’s supervisory systems.
In BrokerCheck, Blankenship “unequivocally denies the allegations.”
Blankenship seeks a temporary restraining order from a federal judge in Pennsylvania’s Eastern District to halt FINRA’s disciplinary proceedings. He further requests a permanent injunction to end the review, arguing that a hearing would be held before an arbiter selected in violation of his Seventh Amendment rights.
A FINRA spokeswoman declined to comment on the lawsuit.
Blankenship’s complaint references the recent Supreme Court ruling in U.S. Securities and Exchange Commission v. Jarkesy, which determined that the SEC could not adjudicate fraud cases in its internal courts.
The lawsuit states, “[T]he imminent disciplinary proceedings are overseen by an agency recently deemed to lack the authority to adjudicate claims consistent with those lodged against Mr. Blankenship, in its administrative courts.”
The Jarkesy case aligns with other federal court rulings that have reduced the power of executive branch agencies, challenging the doctrine that expert agencies can write regulations when Congress’ intent is ambiguous.
Veteran securities lawyer Bill Singer notes the influence of conservative activists on the federal bench aiming to restrict what they see as extraconstitutional activities in the U.S. government.
In this context, Singer sees a strong possibility that one of the cases against FINRA could reach the Supreme Court, creating a potential “existential crisis” for the organization.
Besides the Blankenship case, FINRA is also dealing with a constitutional challenge to its enforcement authority by broker-dealer Alpine Securities Corporation. FINRA argues that a ruling in Alpine’s favor would “eviscerate” its regulatory model.
The outcome of the presidential election could significantly impact FINRA’s future. If Trump wins, Singer anticipates the next attorney general and SEC chair might be more antagonistic toward FINRA. Project 2025, a set of policy proposals seen as a blueprint for a second Trump administration, suggests abolishing FINRA and the Public Company Accounting Oversight Board.
Unlike the SEC, which had the option of using its in-house system or federal court until Jarkesy, FINRA, as a non-government entity, cannot use the court system. This means that a ruling against its use of in-house panels could severely limit its enforcement authority, potentially leading to the organization’s collapse.
“I think the Supreme Court may favorably entertain a call to deem FINRA unconstitutional, and if they do, I don’t see any way to remedy that except to return all that power to the SEC,” Singer says.
