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Regulation and Compliance > Federal Regulation > FINRA

Barred Broker Challenges FINRA's Right to Boot Him; Legal Experts Skeptical

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Securities law experts on Thursday expressed doubt that the Financial Industry Regulatory Authority will lose its ability to bar bad brokers as a result of an ongoing case pitting the Securities and Exchange Commission against a broker that FINRA barred back in 2008.

However, if the U.S. Court of Appeals for the D.C. Circuit rules against the SEC and in favor of ex-broker John M.E. Saad in Saad v. SEC, it would be an “earthquake-sized ruling for FINRA,” according to John Curley, partner at New York law firm Hoguet Newman Regal & Kenney.

In an upcoming hearing in the case, the D.C. Circuit Court of Appeals will consider, among other things, whether an industry bar for broker misconduct can ever be a permissible sanction in a FINRA enforcement proceeding.

Saad, who was barred from the industry following a FINRA disciplinary proceeding that the regulator said proved he submitted false expense reports to his employer and misled investigators about his actions, argued that after the U.S. Supreme Court’s 2017 opinion in Kokesh v. SEC, a FINRA lifetime ban is “punitive” and therefore not a proper FINRA sanction.

The matter has been slowly making its way through the courts. Most recently, the SEC ruled against Saad. However, that decision is now on appeal in the D.C. Circuit.

“One of the issues the Circuit may have to resolve is whether an industry ban is ‘remedial’ or ‘punitive,’” according to Curley, who represents clients in securities-related regulatory investigations and proceedings.

“There is precedent that FINRA may only impose ‘remedial’ and not ‘punitive’ sanctions, and this is where Kokesh’s analysis of what makes a court-ordered relief ‘remedial’ or ‘punitive’ could be relevant,” Curley said. “Of particular note is that in the D.C. Circuit’s remand ruling, then-Circuit Judge [Brett] Kavanaugh concurred in the decision with a forceful argument that an industry bar is not remedial,” Curley pointed out.

“On this appeal, though, even if the D.C. Circuit agrees with Saad that a FINRA bar is punitive, that doesn’t necessarily mean his sanction will be overturned or modified,” Curley said. The court “would have to resolve the tension between its precedent that disallows ‘punitive’ sanctions with legislation that expressly authorizes FINRA to impose bars as long as they are not excessive or oppressive,” he noted. And Kavanaugh’s concurring opinion “recognized that characterizing FINRA bars as ‘punitive’ doesn’t mean that FINRA can’t impose them,” Curley added.

All things considered, he said: “I think Saad has an uphill climb here. One, regardless of whether the D.C. Circuit finds that a FINRA bar is remedial or punitive, I think it’s pretty unlikely that the D.C. Circuit would say that the bar, even if ‘punitive,’ is across-the-board impermissible as a sanction for securities-industry misconduct. Two, it may be difficult for Saad to convince the Circuit that a bar was excessive or oppressive in his case, particularly because the record shows that he misled his employer and regulators.”

After all, Curley added: “Dishonesty is usually a death knell for careers in an industry that depends on public trust.”

Agreeing with Curley about the uphill climb that Saad faces with his case is government investigations and securities enforcement attorney Jacob S. Frenkel, a former federal prosecutor who now serves as a securities enforcement attorney at Dickinson Wright in Washington, D.C.

Saad’s argument is “aggressive and compelling; nevertheless, I think it fails,” Frenkel told ThinkAdvisor on Thursday. And that is because there is a “fundamental difference” between SEC cases, which “represent a state actor taking action,” and FINRA, a private organization performing an “industry self-regulatory function, such that its bars — even permanent bars — are deemed in the public interest and for the protection of investors, thus serving a remedial purpose,” he argued.

“Case law supports that principle,” he said, adding: “Just as a Fifth Amendment assertion is a sacrosanct right in SEC matters, a Fifth Amendment assertion in a FINRA investigation or proceeding results in a permanent bar. Many fail to understand this critical distinction between a state actor versus industry self-regulator, and that will determine the outcome.”

FINRA declined to comment on the dispute Thursday.

— Check out SEC Disgorgement Bill, Passed in House, Could Affect Supreme Court Case on ThinkAdvisor.


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