The Blog Of The Securities Industry Professional Association

Supreme Court Tackles Constitutional Limits of SEC

FINRA could be next if SCOTUS rules as expected

The SCOTUS is hearing a case right now that may change the way the SEC and possibly FINRA have been conducting business for many years now. The SEC has used Administrative Law Judges  (ALJ’s) for some time to hear cases and appeals regarding SEC enforcement.  These ALJ’s have not been appointed by the President as the constitution dictates, and they do hold considerable power within the SEC.  This is very similar to the power hearing officers and the NAC hold with FINRA when hearing cases and appeals.  However, FINRA is a membership organization and for better or worse, members did give up many of their constitutional rights when filling out the form U-4 and fingerprint card.   The crux of this case is whether the SEC has the right to appoint any Tom, Dick or Harry an ALJ and have them decide appeals.

The striking resemblance between the ALJ and FINRA office of Hearing is not hard to see.  In one of the briefs, it is noted that one appointed ALJ has heard 50 SEC cases and ruled in their favor each and every time.  As we noted years ago, FINRA’s Office of Hearing (OHO) wins 93% of the cases they bring before their own handpicked employee.  What’s more astonishing is that on appeal to the FINRA NAC, that percentage increase even higher with 95% affirmation of the lower hearing findings and in about 35% of the cases the NAC increases the sanctions of the OHO.  Although the ALJ and NAC are supposed to be impartial, its almost impossible to have such a high success rate in any walk of life.  Let’s be realistic, if any attorney had a prosecution rate of 93% success of more, every city would be lining up outside their door to hire them as District Attorney or even Attorney General of their respective city or state.

Another point to consider is that the ALJ for the SEC and the OHO for FINRA are paid directly by the respective regulators and can be fired in a heartbeat or receive a bonus totaling nearly a million dollars for a good work.  One FINRA hearing officer received over 7 figures and an $800,000 bonus according to tax returns in his last year of service. While we could reveal his name, we are seeking to point out the inherent conflict that may exist.  If you know your employer can pay you 7 figures and give you a near million dollar bonus, you are instantly conflicted in your perception of right and wrong.  Its human nature not to be, which is why these impartial appointed judges at the ALJ and at FINRA are a risk to any broker brought before them.  We hope the SCOTUS finds the appointment is unconstitutional and gets these appeals in a court of law where they belong.  We further hope that FINRA gives a long hard look at their attempt to mimic the SEC’s ALJ process and becomes more transparent in its quest for justice.  After all, if a lawyer can win 93 % of the time in FINRA hearing, surely he/she can win at least 75% of the appeals brought to an impartial NAC?  At least one would hope so.  What do you think?  Please leave your feedback.

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April 23rd, 2018



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