Aslin v. Fin. Indus. Regulatory Auth., Inc.

• Decision Date: 02 January 2013
• Docket Number: No. 12–2250.,12–2250.
• Parties: Neil J. ASLIN, Plaintiff–Appellant, v. FINANCIAL INDUSTRY REGULATORY AUTHORITY, INCORPORATED, Defendant–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

704 F.3d 475

Neil J. ASLIN, Plaintiff–Appellant,

v.FINANCIAL INDUSTRY REGULATORY AUTHORITY, INCORPORATED, Defendant–Appellee.

No. 12–2250.

United States Court of Appeals,Seventh Circuit.

Argued Nov. 2, 2012.

Decided Jan. 2, 2013.

Nicholas P. Iavarone (argued), Jennifer M. Muchoney, Attorneys, Iavarone Law Firm, Chicago, IL, for Plaintiff–Appellant.

Terri L. Reicher (argued), Attorney, National Association of Securities Dealers, Washington, DC, for Defendant–Appellee.

Before MANION, WILLIAMS, and HAMILTON, Circuit Judges.

HAMILTON, Circuit Judge.

On May 4, 2011, BEST Direct fired Neil Aslin from his job as a securities broker in order to remain compliant with a Financial Industry Regulatory Authority (FINRA) rule known as the “Taping Rule.” The rule requires a securities firm to adopt significant monitoring measures when too many of its brokers have recently worked for “Disciplined Firms.” Instead of adopting those monitoring measures, the employer also has the choice of terminating the employment of enough such brokers, and that is what BEST Direct did. Aslin then filed this suit alleging that FINRA violated his Fifth Amendment right to due process by including him on the list of brokers from Disciplined Firms without providing him the opportunity to challenge the designation. He sought declaratory and injunctive relief to stop FINRA from including him on the list.

The district court dismissed the case, concluding that Aslin failed to state a claim because he was not deprived of a property or liberty interest protected by the Due Process Clause of the Fifth Amendment.¹ We agree with the district court's dismissal of Aslin's complaint but on different grounds. Since Aslin sought only injunctive and declaratory relief to prevent application of the rule to him, the controversy ended in March 2012, after which Aslin was no longer included on the list of brokers from Disciplined Firms. Because of this, the case was moot when the district court issued its decision in April 2012. Accordingly, we vacate the district court's opinion and modify the dismissal to one for lack of subject matter jurisdiction.

I. Factual and Regulatory BackgroundA. FINRA

FINRA is a private, non-profit corporation that is registered with the Securities and Exchange Commission (SEC) as a “national securities association.” Such private regulation was made possible by the Maloney Act, which provided for the establishment of self-regulatory organizations to oversee the securities markets. 15 U.S.C. §§ 78 o et seq. In this capacity FINRA creates and enforces rules that govern the industry alongside the SEC and is subject to significant SEC oversight. The SEC must approve all of FINRA's rules, 15 U.S.C. § 78s(b)(1), and the SEC may abrogate, add to, and delete from all FINRA rules as it deems necessary. 15 U.S.C. § 78s(c).

Firms that deal in securities must comply with FINRA rules because federal law requires them to do so. Federal securities law requires most securities firms to register with a national securities association and to follow the association's rules. 15 U.S.C. § 78 o(b)(11). FINRA is currently the only national securities association, so all such brokerage firms must register with FINRA. In addition to firms, FINRA regulates individual securities brokers by requiring them to register and abide by FINRA's rules. FINRA Rule 1031. Employees required to register with FINRA must pass an examination and are referred to as “registered persons” in FINRA's rules.

B. The Taping Rule

Aslin's suit challenges a FINRA rule known as the “Taping Rule,” which requiressecurities firms employing a certain number persons who previously worked at Disciplined Firms to “establish, maintain, and enforce special written procedures for supervising the telemarketing activities” of their employees. FINRA Rule 3010(b)(2), available at http:// finra. complinet. com/ (last accessed Dec. 27, 2012).² A firm is considered to be “Disciplined Firm” if, among other reasons, the firm has been expelled from membership in FINRA in connection with securities sales practices. FINRA Rule 3010(b)(2)(J). A broker counts toward a firm's number of brokers from Disciplined Firms if he or she was registered for at least 90 days with a Disciplined Firm within the past three years. FINRA Rule 3010(b)(2)(H). The rule is intended to prevent brokers from moving en mass from a firm that engaged in unlawful telemarketing practices to a new firm where they might start the illegal activity anew. SEC Release No. 34–39361, 62 Fed.Reg. 64422, at 64424 (Dec. 5, 1997).

FINRA determines when a firm is subject to the Taping Rule by using a list of the brokers who previously worked at Disciplined Firms. Inclusion on the list is automatic; FINRA makes no determination of individual wrongdoing and gives the broker no opportunity to avoid inclusion. For firms with between ten and twenty registered persons, a firm is subject to the Taping Rule “where four or more of its registered persons have been associated with one or more Disciplined Firms in a registered capacity within the last three years.” FINRA Rule 3010(b)(2)(H). A firm that becomes subject to the rule must then either institute the required monitoring procedures, which we are told can be quite expensive, especially for smaller firms like BEST Direct, or reduce the number of employed brokers who previously worked for Disciplined Firms. The latter is what happened to Aslin.

Aslin worked at Brewer Financial from May 2005 through March 2009. He then moved to BEST Direct in April 2009. On March 5, 2011, Brewer Financial became a Disciplined Firm when it agreed to be expelled from FINRA to settle a disciplinary matter relating to private security offerings. Even though Aslin was no longer working at Brewer Financial when it became a Disciplined Firm, he was counted for purposes of the Taping Rule because he had worked there within the past three years. On April 1, 2011, FINRA notified BEST Direct that it was subject to the Taping Rule because 11 of its 17 registered brokers had worked for Brewer Financial—a Disciplined Firm—within the past three years. On May 4, 2011, BEST Direct fired Aslin (and presumably a few other former Brewer Financial brokers) to avoid instituting the monitoring system.

II. Mootness

A case becomes moot, and the federal courts lose subject matter jurisdiction, when a justiciable controversy ceases to exist between the parties. See Honig v. Doe, 484 U.S. 305, 317, 108 S.Ct. 592, 98 L.Ed.2d 686 (1988) (grounding mootness doctrine in the Constitution's Article III requirement that courts adjudicate only “actual, ongoing cases or controversies”); Stotts v. Community Unit School Dist. No. 1, 230 F.3d 989, 990–91 (7th Cir.2000) (dismissing appeal as moot). Mootness commonly arises where a federal court becomes unable to award meaningful relief in the case. This is often so where a plaintiff seeks only injunctive or declaratory relief and the defendant discontinues the conduct in dispute. See, e.g., Board of Education of Oak Park v. Nathan R., 199 F.3d 377, 378 (7th Cir.2000) (“issue of whether the School was obliged to provide special education services to [student] during his expulsion is moot because he has graduated from high school”). In such a case there is no longer any ongoing wrongdoing to remedy, so a justiciable controversy no longer exists, unless the dispute is “capable of repetition yet evading review.” We conclude that this action must be dismissed as moot. There is no longer an ongoing controversy, nor does this dispute fit into the narrow exception for disputes likely to be capable of repetition yet evading review.

A. Ongoing Controversy

Aslin's case is moot because he no longer has the designation that he claims violates his due process rights, and he is not seeking any retrospective relief. As we know, a broker is included on the list of brokers who worked at Disciplined Firms only if the broker worked at a Disciplined Firm within the last three years. Aslin last worked at a Disciplined Firm—Brewer Financial—in March 2009. By the end of March 2012 FINRA no longer counted him as a member of a Disciplined Firm under the Taping Rule. When the district court decided the case in April 2012, Aslin no longer had the designation he challenged.

Because Aslin was no longer being counted adversely under the rule, there was no justiciable controversy. Aslin's complaint seeks only: (1) a declaration that the Taping Rule denied him due process of law and (2) an injunction preventing the application of the rule to him unless and until he is afforded an opportunity to challenge the designation. The court could not grant or effect the relief Aslin sought—to prevent FINRA from designating him as a member of a Disciplined Firm without process—since FINRA is no longer designating Aslin as such or threatening to designate him in the immediate future. If this suit were to continue, Aslin would be asking a court either to tell FINRA to stop doing something that it is not doing, or to declare rights and obligations about a controversy that no longer exists. In either case there is no longer an ongoing controversy and no jurisdiction.³

Aslin contends, however, that the alleged violation of his due process rights is continuing to cause him harm that this suit may remedy. He contends that the rule caused him to be terminated from his employment, and that he has not yet been reinstated or found other work as a broker. He also claims that this fact will make it more difficult for him to get employment in the future. But these injuries, significant though they may be, could not be remedied by the relief sought in this case. A declaration that a rule not currently being applied to Aslin violates his due process rights does not address the problem of lingering harm from the actions of private persons. Such a declaration would not require BEST Direct to rehire Aslin or prohibit a prospective employer from considering the fact...