State regulators, PIABA back Finra against claim it’s unconstitutional

investmentnews.com:

Two groups sometimes at odds with Finra over how best to protect investors are backing the regulator against a lawsuit that questions its constitutionality.

The Financial Industry Regulatory Authority Inc. is defending itself against a claim brought by Alpine Securities Corp., a firm Finra expelled in March 2022 for misusing customer funds, charging unreasonable fees and making unauthorized trades and capital withdrawals.

In its lawsuit, Alpine argues Finra violates the Constitution because its disciplinary hearing officers aren’t properly appointed by the executive branch. The firm also claims Finra operates inappropriately as a state actor.  

In July, the U.S. Court of Appeals for the D.C. Circuit upheld a preliminary injunction against Finra that allows Alpine to continue to conduct business while it appeals Finra’s bar.

If Alpine wins the case, it could threaten Finra’s existence. Last Friday, state securities regulators and arbitration lawyers came to the defense of the brokerage industry self-regulator.

The North American Securities Administrators Association, the membership organization for state regulators, said Finra plays a critical regulatory role. In an amicus brief filed with the D.C. Court of Appeals, NASAA said Finra sets and enforces standards for approximately 3,400 brokerage firms and 624,000 registered representatives, maintains critical databases, such as the Central Registration Depository and the Investment Adviser Registration Depository, and performs market surveillance.

“Finra provides essential services like these that state and federal securities regulators, thousands of firms, hundreds of thousands of registered persons, and millions of American investors rely upon,” NASAA counsel Zachary