Second Circuit Holds That FINRA Cannot Use The Courts To Collect Disciplinary Fines

Introduction

October 5, 2011, in Fiero v. FINRA, No. 09-1556-cv (2d Cir. Oct. 5, 2011), the United States Court of Appeals for the Second Circuit held that FINRA and other self-regulatory organizations lack the authority to bring federal court actions to collect on their disciplinary fines. The decision leaves in its wake an apparent gap in FINRA's enforcement arsenal; it can levy fines, but it cannot enforce collection of those fines in court. Although the import of this revelation might seem considerable at first glance, the true consequence of this decision is likely to be felt primarily in a narrow, yet important, swath of FINRA disciplinary matters.

FINRA1 has long maintained the view, rooted in a 1990 rule filing and an associated Notice to Members (the "1990 Rule"), that it has the authority to seek judicial enforcement of its disciplinary fines. Although FINRA contended to its membership that it held such power, it generally did not seek to utilize that power to collect fines. In Fiero, as part of a long-running feud with one of its former members, FINRA deviated from its standard practice and sought enforcement of a disciplinary fine in both state and federal court. As discussed below, the results represent a resounding blow to FINRA's collection efforts.

Procedural Posture

In December 2000, a FINRA Hearing Panel found that Fiero Brothers, a registered broker-dealer, and John J. Fiero, its sole registered representative (together, the "Fieros"), violated the antifraud provisions of the Securities Exchange Act of 1934 ("Exchange Act") as well as certain FINRA Conduct Rules. The hearing panel expelled Fiero Brothers, barred Mr. Fiero from associating with any FINRA member firm, and imposed a fine of $1,000,000 plus costs on the Fieros, jointly and severally. The National Adjudicatory Council ("NAC") affirmed the hearing panel's decision and the Fieros did not appeal the NAC's decision to the SEC.2 Subsequently, however, the Fieros refused to pay the fine, so FINRA brought an action in state court seeking to collect. Ultimately, the New York Court of Appeals ruled that FINRA's complaint constituted an action to enforce a liability created under the Exchange Act, which is within the exclusive jurisdiction of the federal courts. Therefore, the action was dismissed for lack of subject matter jurisdiction. See FINRA v. Fiero, 882 N.E.2d 879 (N.Y. 2008).

The Fieros then sought a declaratory judgment in federal court that FINRA lacks...