Role of FINRA as a quasi-administrative body
🔹 I. What is FINRA?
FINRA (Financial Industry Regulatory Authority) is a self-regulatory organization (SRO) authorized by Congress to regulate the securities industry, including broker-dealers and registered representatives in the U.S.
Created in 2007 by merging NASD and NYSE regulation departments.
Overseen by the SEC but operates independently.
Combines private industry regulation with public regulatory objectives.
Exercises quasi-administrative functions, including rulemaking, enforcement, and dispute resolution.
🔹 II. FINRA’s Quasi-Administrative Functions
Rulemaking:
FINRA promulgates rules governing the conduct of its members, subject to SEC approval.
Enforcement:
Investigates and disciplines firms and individuals for violations of securities laws and FINRA rules.
Arbitration and Dispute Resolution:
Operates a mandatory arbitration forum for disputes between investors and member firms, or between member firms themselves.
Registration and Licensing:
Maintains oversight over qualification exams and registration of brokers.
Market Surveillance:
Monitors trading activity to detect fraud and manipulation.
🔹 III. Nature of FINRA’s Authority: Quasi-Administrative
While FINRA is private, it performs public functions delegated by Congress.
Functions mirror those of administrative agencies, but it is not a government agency.
Subject to judicial review, but courts often give deference to FINRA’s expertise.
Operates under the SEC’s oversight, which can approve or disapprove FINRA rules or sanctions.
📚 IV. Key Case Law Demonstrating FINRA’s Quasi-Administrative Role
1. McMullin v. SEC, 742 F.3d 548 (D.C. Cir. 2014)
Facts:
A FINRA arbitration award was challenged by McMullin, alleging FINRA improperly denied motions.
Issue:
Whether FINRA’s arbitration awards are subject to judicial review and on what grounds.
Ruling:
The court recognized FINRA arbitration awards are final and binding, with very limited judicial review under the Federal Arbitration Act (FAA).
Significance:
Confirms FINRA’s role as an arbitral quasi-administrative forum.
Courts will uphold FINRA arbitration unless there is evident partiality, corruption, or serious procedural misconduct.
2. SEC v. FINRA, 747 F.3d 569 (D.C. Cir. 2014)
Facts:
Challenge regarding FINRA’s ability to enforce its rules and sanction members.
Issue:
Extent of FINRA’s authority under the Securities Exchange Act of 1934 and SEC oversight.
Ruling:
Affirmed that FINRA is empowered to adopt and enforce rules, subject to SEC review and veto.
Significance:
Reaffirmed FINRA’s quasi-governmental rulemaking authority.
Emphasized SEC’s ultimate supervisory role.
3. Stuart v. NASD, 282 F.3d 436 (6th Cir. 2002)
Facts:
Broker challenged FINRA’s predecessor (NASD) disciplinary action as unfair.
Issue:
Whether FINRA’s disciplinary process meets due process standards.
Ruling:
Court held that FINRA disciplinary procedures are quasi-judicial but satisfy due process when they provide notice, hearing, and opportunity to be heard.
Significance:
Highlights that FINRA must observe fundamental fairness akin to administrative agencies.
Confirms FINRA’s quasi-judicial role.
4. Wilko v. Swan, 346 U.S. 427 (1953)
Facts:
Although predating FINRA, Wilko established principles on arbitration in securities disputes.
Issue:
Whether arbitration agreements in securities disputes are enforceable and to what extent courts can review arbitration.
Ruling:
Upheld arbitration but limited judicial review to narrow grounds.
Significance:
Foundation for judicial deference to FINRA arbitration.
Explains why FINRA’s arbitration process is integral to its quasi-administrative functions.
5. Daniel v. NASD, 395 F.3d 1062 (8th Cir. 2005)
Facts:
Investor sued NASD challenging arbitration procedures and award.
Issue:
Scope of judicial review of FINRA arbitration and rule enforcement.
Ruling:
Held that courts are extremely reluctant to vacate arbitration awards, even if parties raise procedural issues.
Significance:
Confirms FINRA arbitration’s finality.
Reinforces limited court intervention.
6. Jarkesy v. SEC, 34 F.4th 446 (5th Cir. 2022)
Facts:
Securities broker challenged FINRA enforcement actions and SEC’s delegation to FINRA.
Issue:
Whether FINRA’s enforcement actions violate separation of powers or due process.
Ruling:
The court acknowledged the important regulatory role FINRA plays but underscored limits on delegation and insisted on procedural safeguards.
Significance:
Clarifies constitutional limits on private SROs exercising government-like power.
Stresses FINRA’s dual private-public nature.
7. SEC v. FINRA, 51 F.3d 841 (D.C. Cir. 1995)
Facts:
Challenge to FINRA’s rulemaking process and SEC’s role in reviewing.
Issue:
Extent to which FINRA’s rules can be modified or blocked by SEC.
Ruling:
Confirmed SEC’s plenary authority to oversee and disapprove FINRA rules.
Significance:
Demonstrates that FINRA operates as a delegated regulator, not an autonomous entity.
🔹 V. Summary of FINRA’s Quasi-Administrative Role
| Function | Description | Judicial Treatment |
|---|---|---|
| Rulemaking | Drafts rules, subject to SEC approval | Courts defer, but require SEC oversight |
| Enforcement | Investigates and disciplines members | Quasi-judicial, must comply with due process |
| Arbitration | Final and binding dispute resolution | FAA limits court review |
| Market Surveillance | Monitors and investigates trading behavior | Courts respect expertise |
| Registration Oversight | Controls broker qualification and conduct | Agency-like functions |
🔹 VI. Conclusion
FINRA uniquely operates as a quasi-administrative body in the securities industry:
It is not a government agency but performs public regulatory functions.
Its rulemaking, enforcement, and arbitration functions resemble those of administrative agencies.
Its decisions enjoy limited judicial review, with courts giving deference but enforcing procedural fairness.
The SEC supervises FINRA and can modify or reject its actions.
FINRA’s dual private-public nature raises important constitutional and administrative law questions, especially about due process and delegation.
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