Alpine Sec. Corp. v. Fin. Indus. Regulatory Auth.
| Decision Date | 07 September 2021 |
| Docket Number | 2:20-cv-00794-DBB-DBP |
| Parties | ALPINE SECURITES CORPORATION, a Utah Corporation, Plaintiff, v. FINANCIAL INDUSTRY REGULATORY AUTHORITY, a Delaware Corporation, Defendants. |
| Court | U.S. District Court — District of Utah |
Before the court is Defendant Financial Industry Regulatory Authority's (FINRA) Motion to Dismiss (Motion).[1] Having reviewed the parties' briefing the court concludes the motion may be resolved without oral argument.[2] Because this court lacks subject-matter jurisdiction, the Motion is GRANTED.
Alpine Securities Corporation (Alpine) is a registered broker-dealer, clearing firm, and member of FINRA.[3] In August 2019, FINRA's Department of Enforcement (DOE) began disciplinary proceedings against Alpine regarding alleged excessive fees Alpine had charged.[4]FINRA has been authorized under the Securities Exchange Act of 1934 (Exchange Act) to create rules and regulations regarding how it conducts proceedings and investigations.[5] In defending against the disciplinary proceeding, Alpine appeared at an in-person hearing that began on February 18, 2020.[6] The DOE presented six witnesses and documentary evidence while Alpine presented one witness before the hearing was adjourned on February 22, 2020 due to an urgent matter for Alpine's counsel.[7] The hearing was to resume in late April 2020, but the COVID-19 pandemic delayed the hearing.[8] Over the next few months, the parties discussed the possibility of proceeding and potentially presenting testimony virtually.[9] Alpine expressed its concerns about proceeding virtually.[10] On August 31, 2020, FINRA adopted a temporary amendment (Amendment) to FINRA Rule 9261 providing that FINRA proceedings could continue virtually.[11] On November 2, 2020, the Chief Hearing Officer ordered the remainder of Alpine's proceedings to resume on November 30, 2020 by virtual means.[12]
Shortly thereafter, Alpine filed a complaint against FINRA for: (1) declaratory judgment that FINRA breached its agreement with Alpine, (2) violation of Alpine's Due Process Rights; (3) preliminary and permanent injunctive[13] relief; and (4) declaratory judgment that the Amendment to FINRA's rules is invalid.
FINRA moved to dismiss the case on six grounds: (1) the Exchange Act's exclusive review process strips this court of subject-matter jurisdiction; (2) Alpine lacks a private right of action to pursue claims; (3) FINRA is immune from claims arising from the performance of its regulatory functions; (4) Alpine's due process claim fails because FINRA is not a state actor; (5) Alpine's declaratory relief claims are meritless; and (6) Alpine admitted it was not entitled to injunctive relief.
“Federal courts are courts of limited jurisdiction.. .It is to be presumed that a cause lies outside this limited jurisdiction and the burden of establishing the contrary rests upon the party asserting jurisdiction.”[14] District courts are precluded from hearing claims subject to an exclusive administrative review process.[15] Motions to dismiss for lack of subject-matter jurisdiction can take two forms: (1) “a facial attack on the complaint's allegations as to subject matter jurisdiction;” and (2) a factual attack that goes beyond allegations contained in the complaint and challenges “the facts upon which subject matter jurisdiction depends.”[16] As to a facial attack, the court must accept the allegations in the complaint as true and with a factual attack, the court “may not presume the truthfulness of the complaint's factual allegations.”[17]FINRA makes a facial attack as to jurisdiction, so the court relies on the allegations in the complaint. Additionally, because the resolution of the jurisdictional question is not intertwined with the merits of the case, the motion is not converted to a Rule 12(b)(6) motion or a Rule 56 summary judgment motion.[18]
Alpine brings this action because it is concerned about FINRA's process for conducting the disciplinary hearing against it. Specifically, Alpine asserts that it will be disadvantaged if the remainder of its disciplinary hearing is held virtually opposed to in-person. In other words, Alpine is alleging that the use of video conferencing violates its rights.
The Exchange Act authorizes the Securities and Exchange Commission (SEC) to register self-regulatory organizations such as FINRA, that then have authority to promulgate rules and regulations to enforce compliance with the Exchange Act.[19] The Exchange Act dictates how disciplinary proceedings of registered association members are conducted.[20] Under this guidance and authority, FINRA has enacted rules of procedure regarding disciplinary proceedings and review of the disciplinary proceeding.[21] The rules provide that after receiving a decision in a FINRA disciplinary proceeding, either party may file an appeal to the National Adjudicatory Council (NAC).[22] The NAC may affirm, dismiss, modify, or reverse the decision of the FINRA hearing panel.[23] A Governor of the FINRA Board then may call for a review of the NAC determination by the FINRA Board.[24] This becomes FINRA's final action.[25]
Under the Exchange Act, after FINRA's final disciplinary action is taken, it must file notice with the SEC.[26] An aggrieved respondent may apply for review of the final disciplinary action by the SEC.[27] The SEC can affirm, modify, set aside, or remand the action.[28] If a party is aggrieved with the SEC's final decision, it can obtain review in the appropriate United States Court of Appeals.[29]
So, to summarize, FINRA initiates a disciplinary proceeding. The hearing panel issues a decision. An aggrieved party can appeal FINRA's decision to the NAC. If the party is unhappy with the NAC's decision, it can file an appeal with the SEC. And if the party is unhappy with the SEC's decision, it can appeal to the appropriate United States Court of Appeals.
Whether this court has jurisdiction depends on whether this “statutory scheme” precludes a separate action in the district court. The Supreme Court's decision in Thunder Basin Coal Company v. Reich[30] established a two-part “framework for determining when a statutory scheme of administrative and judicial review forecloses parallel district-court jurisdiction.”[31] To succeed under the first step, the court must “find that Congress has allocated initial review to an administrative body where such intent is ‘fairly discernible in the statutory scheme.'”[32] As to the second step, the claims must be “of the type Congress intended to be reviewed within the statutory structure.”[33] Three factors in making this second determination are: (1) whether the claims are “wholly collateral” to a statute's review provisions; (2) if the claims are outside the agency's expertise; and (3) the availability of meaningful review.[34]
In determining whether congressional allocation of initial review is “fairly discernible, ” courts review the statute's language, structure, purpose, and legislative history.[35] “Generally, when Congress creates procedures ‘designed to permit agency expertise to be brought to bear on particular problems,' those procedures ‘are to be exclusive.'”[36]
The Exchange Act's language and structure support such a finding. As discussed above, the Exchange Act and FINRA's rules provide: (1) that a respondent to a disciplinary proceeding can seek review of that result from the NAC; (2) if the party is unhappy with the NAC's conclusion, it can appeal to the SEC; (3) if the party is then unhappy with the SEC's conclusion, it can seek judicial review by a United States Court of Appeal.[37] This process is detailed, provides multiple avenues for review, and culminates in judicial review. This shows congressional intent to allow FINRA and the SEC to review claims like those at issue here. The Exchange Act provides a mechanism by which all FINRA disciplinary proceedings can receive a final administrative action and then can be reviewed by the SEC and the appropriate appellate court.
Additionally, the Exchange Act and the Federal Mine Safety and Health Amendments Act (Mine Act) contain “nearly identical judicial-review provisions.”[38] In Thunder Basin, the Supreme Court determined the Mine Act to be exclusive and precluding district court jurisdiction.[39] Under the Mine Act, the mine operator had thirty days to challenge before any citation was issued.[40] The challenge was to be heard before an ALJ with review by the Federal Mine Safety and Health Review Commission (FMSHRC).[41] A mine operator could challenge the adverse FMSHRC decision in an appropriate court of appeals.[42] That process is similar to the procedures detailed above in the Exchange Act and FINRA rules.
Additionally, while the parties do not cite to any Tenth Circuit cases, other circuits have analyzed the language and purpose of the Exchange Act and concluded that because of the “painstaking detail with which Congress set forth the rules governing the court of appeals' review of Commission action, it is fairly discernible that Congress intended to deny [aggrieved respondents] an additional avenue of review in district court.”[43] These cases are persuasive and informative.
The Exchange Act's scheme is detailed and comprehensive, and it is “fairly discernible” that Congress intended review of Alpine's claims to initially be reviewed within that scheme.
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