More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
A federal appeals court in Manhattan ruled on Wednesday that the Financial Industry Regulatory Authority (FINRA) does not have the right to take its members to court to enforce its disciplinary actions, The New York Times reported.
The ruling, which The Times calls a “surprise decision,” curbs the powers of FINRA and 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, The Times says that FINRA accused 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, The Times reported.
But a three-judge panel of the U.S. Court of Appeals for the Second Circuit ruled that FINRA had no right to shutter the firm and bar its owner. In an opinion written by Judge Ralph K. Winter Jr., The Times writes that “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,” Winter wrote. “We hold that it does not and reverse.”
The Times notes that 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.”
While The Times reported that some securities law experts say the ruling “neuters” FINRA, Brian Rubin, a partner in the law firm Sutherland Asbill & Brennan’s Washington office, who’s a member of the firm’s Litigation Practice Group, and represents broker-dealers and investment advisors, told AdvisorOne that he doesn’t think the case “is as significant as it’s being portrayed.”
The Times article, he said, missed the fact that “for the past several years, FINRA’s Sanction Guidelines have discouraged ordering fines if a rep is barred. Therefore, under the current procedures, there probably wouldn’t have been a fine ordered against Fiero.” Added Rubin: “I think it’s a matter of resources. FINRA wants to stop wrongdoers from continuing to act. FINRA has a broader mission than simply imposing fines. In addition, reps who are suspended (as opposed to barred) and fined aren’t allowed to return to the industry until they pay the fine. The decision doesn’t impact that.”
As for how the decision may impact the Securities and Exchange Commission’s power, Rubin said, “The SEC has its own statutes.”
With regard to the proposed new self regulatory organization for advisors—and FINRA taking on that SRO role—Rubin says this decision will have “minimal or no impact.” At this point, “we don’t know how [any SRO] legislation will shape up, and whether there will be a mechanism for the new SRO to collect fines. The decision doesn't affect FINRA’s current status as the leading candidate to become the SRO.”