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

• Decision Date: 05 October 2011
• Docket Number: Docket Nos. 09–1556–cv(L),09–1863–cv(XAP).
• Citation: 660 F.3d 569
• Parties: John J. FIERO and Fiero Brothers, Inc., Plaintiffs–Counter–Defendants–Appellants–Cross–Appellees, v. FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC., Defendant–Counterclaimant–Appellee–Cross–Appellant.
• Court: U.S. Court of Appeals — Second Circuit

660 F.3d 569

John J. FIERO and Fiero Brothers, Inc., Plaintiffs–Counter–Defendants–Appellants–Cross–Appellees,

v.FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC., Defendant–Counterclaimant–Appellee–Cross–Appellant.

Docket Nos. 09–1556–cv(L)

09–1863–cv(XAP).

United States Court of Appeals, Second Circuit.

Argued: April 6, 2010.Decided: Oct. 5, 2011.

Brian D. Graifman, Gusrae, Kaplan, Bruno & Nusbaum, PLLC, New York, N.Y., for Plaintiffs–Counter–Defendants–Appellants–Cross–Appellees.

Terri L. Reicher, Financial Industry Regulatory Authority, Inc., Washington, D.C., for Defendant–Counterclaimant–Appellee–Cross–Appellant.

Before: JACOBS, Chief Judge, WINTER, and JOHN M. WALKER, JR., Circuit Judges.

WINTER, Circuit Judge:

John J. Fiero (“Fiero”) and Fiero Brothers, Inc. (“Fiero Brothers”) (together, “Fieros”) appeal from Judge Marrero's dismissal of their complaint, which sought a declaratory judgment that, inter alia, the Financial Industry Regulatory Authority, Inc. (“FINRA”) lacks the authority to bring court actions to collect disciplinary fines it has imposed. We hold that FINRA lacks such authority. We therefore reverse the dismissal of the complaint and vacate the money judgment on FINRA's counterclaim.

BACKGROUND

a) FINRA's Role

FINRA is a “self-regulatory organization” (“SRO”) as a national securities association registered with the SEC pursuant to the Maloney Act of 1938, 15 U.S.C. § 78 o–3, et seq. See Desiderio v. Nat'l Ass'n of Sec. Dealers, Inc., 191 F.3d 198, 201 (2d Cir.1999). FINRA is the successor to the National Association of Securities Dealers (“NASD”).¹ It “is responsible for conducting investigations and commencing disciplinary proceedings against [FINRA] member firms and their associated member representatives relating to compliance with the federal securities laws and regulations.” D.L. Cromwell Invs., Inc. v. NASD Regulation, Inc., 279 F.3d 155, 157 (2d Cir.2002) (quoting Datek Sec. Corp. v. Nat'l Ass'n of Sec. Dealers, Inc., 875 F.Supp. 230, 232 (S.D.N.Y.1995) (internal quotation marks omitted)). As a practical matter, all securities firms dealing with the public must be members of FINRA. See Sacks v. SEC, 648 F.3d 945, 948 (9th Cir.2011) (citing 72 Fed.Reg. 42,169, 42,170 (Aug. 1, 2007); 15 U.S.C. §§ 78c(a) 26, 78s(b)) (noting that FINRA is “responsible for regulatory oversight of all securities firms that do business with the public”); see also note 1, supra. FINRA's disciplinary proceedings are governed by the FINRA Code of Procedure (“FINRA COP”).² The FINRA COP has been approved by the SEC, as required by Section 19 of the Securities Exchange Act of 1934. 15 U.S.C. § 78s(b) (describing the required procedure for approval of proposed SRO rule changes).

FINRA has the power to initiate a disciplinary proceeding against any FINRA member or associated person for violating any FINRA rule, SEC regulation, or statutory provision. Id. § 78s(h)(3). To issue a complaint, FINRA's Department of Enforcement or Department of Market Regulation must obtain authorization from the FINRA Regulation Board or FINRA Board. FINRA COP § 9211. After a complaint is filed, a hearing panel conducts a hearing and issues a decision. Id. § 9231. Final decisions of the hearing panel may be appealed to the FINRA National Adjudicatory Council (“NAC”), which can affirm, modify, or reverse the hearing panel's decision. Id. §§ 9311, 9349(a), 9268–9269. NAC decisions may then be appealed to the SEC, pursuant to 15 U.S.C. § 78s(d), and from the SEC to the United States Court of Appeals, pursuant to 15 U.S.C. § 78y. 15 U.S.C. §§ 78s(d), 78y(a); see also Mister Discount Stockbrokers v. SEC, 768 F.2d 875, 876 (7th Cir.1985).

b) The Disciplinary Action Against the Fieros

Fiero Brothers, a New York corporation, was a FINRA member firm and broker-dealer registered with the SEC. John J. Fiero was the sole registered representative of Fiero Brothers. As such, the Fieros were subject to the regulations and discipline of NASD.

On February 6, 1998, NASD's Department of Enforcement initiated disciplinary proceedings against the Fieros, the merits of which are not pertinent to this appeal. On December 6, 2000, an NASD hearing panel held that the Fieros had violated Section 10(b) of the Exchange Act, Rule 10b–5, and FINRA Conduct Rules 2110, 2120, and 3370. The hearing panel expelled Fiero Brothers, barred Fiero from associating with any FINRA-member firm in any capacity, and fined the Fieros $1,000,000 plus costs, jointly and severally.

On appeal, the NAC affirmed the hearing panel's decision in its entirety. John Fiero, Nat'l Adjudicatory Council No. CAF980002, 2002 WL 31476976, at *34 (Oct. 28, 2002). The Fieros did not appeal the NAC's decision to the SEC.

c) State Court Proceedings

After the Fieros refused to pay the fine, FINRA commenced an action on December 22, 2003, in New York Supreme Court. Fin. Indus. Regulatory Auth., Inc. v. Fiero, 10 N.Y.3d 12, 853 N.Y.S.2d 267, 882 N.E.2d 879, 880–81 (2008). On September 12, 2005, the Supreme Court concluded that “NASD's claim [was] firmly based on ordinary principles of contract law” because the Fieros had “expressly agreed to comply with all NASD rules, including the imposition of fines and sanctions” when they voluntarily executed the NASD registration forms. Nat'l Ass'n of Sec. Dealers, Inc. v. Fiero, 2005 N.Y. Slip Op. 30161(U), at 2, 2005 WL 6012105 (Sept. 12, 2005). The Supreme Court further stated that “New York state courts have long recognized the right of a private membership organization to impose fines on its members, when authorized to do so by statute, charter or by-laws,” and that “NASD is not ‘just a private club,’ but a self-regulatory organization, federally-mandated under ... the Exchange Act to discipline its members and enforce the federal securities laws as well as its own SEC-approved rules.” Id. at 4–5. On May 11, 2006, the Supreme Court awarded the NASD a judgment of $1,329,724.54. Nat'l Ass'n of Sec. Dealers, Inc. v. Fiero, 2006 N.Y. Slip Op. 30302(U), 2006 WL 5251396 (May 11, 2006).

The First Department of the New York Appellate Division affirmed the Supreme Court's decision. Nat'l Ass'n of Sec. Dealers, Inc. v. Fiero, 33 A.D.3d 547, 827 N.Y.S.2d 4, 5 (1st Dep't 2006). The New York Court of Appeals granted the Fieros leave to appeal, and on February 7, 2008, reversed on the ground that the state courts lacked subject matter jurisdiction. Fiero, 853 N.Y.S.2d 267, 882 N.E.2d at 881–82. The court explained that the FINRA complaint constituted an action to enforce a liability or duty created under the Exchange Act, and therefore, fell within the exclusive jurisdiction of the federal courts pursuant to 15 U.S.C. § 78aa. Id., 853 N.Y.S.2d 267, 882 N.E.2d at 882.

d) Federal Court Proceedings

On February 8, 2008, the day after the New York Court of Appeals issued its ruling, the Fieros filed the instant action seeking a declaratory judgment that, inter alia, FINRA has no authority to collect fines through judicial proceedings.³ FINRA thereafter filed a counterclaim, seeking to enforce the fine under a breach of contract theory. Both parties moved to dismiss the complaint and counterclaim, respectively.

On March 30, 2009, the district court granted FINRA's motion to dismiss the Fieros' claim, denied the Fieros' motion to dismiss FINRA's counterclaim, and instructed the clerk to enter judgment in favor of FINRA.⁴

DISCUSSION

We review a district court's grant of a motion to dismiss de novo. Chase Grp. Alliance v. City of N.Y. Dep't of Fin., 620 F.3d 146, 150 (2d Cir.2010). Our review of a district court's legal conclusions, including the interpretation of a federal statute, is also de novo. United States v. Fuller, 627 F.3d 499, 503 (2d Cir.2010).⁵

The Fieros argue that while the Exchange Act and FINRA's rules and bylaws authorize FINRA to impose sanctions on its members, it has no authority to bring judicial actions to collect monetary sanctions. FINRA argues that it has this authority under the Exchange Act and from a FINRA rule submitted to, and not disapproved by, the SEC in 1990 (“1990 Rule Change”). See Notice of Filing and Immediate Effectiveness of Proposed Rule Change by NASD Relating to the Collection of Fines and Costs in Disciplinary Proceedings, Exchange Act SEC Release No. 28227, 46 S.E.C. Docket 1049 (July 18, 1990) (hereinafter “SEC Notice of 1990 Rule Change”). We discuss each argument seriatim.

a) FINRA's Authority Under the Exchange Act

The first question is whether the Exchange Act provides FINRA with the necessary authority. We hold that it does not.

Under Section 15A(b) of the Exchange Act, SRO's have a statutory authority and obligation to “appropriately discipline[ ]” their members for violation of any provision of the Exchange Act, the rules or regulations promulgated thereunder, or their own rules, “by expulsion, suspension, limitation of activities, functions, and operations, fine, censure, being suspended or barred from being associated with a member, or any other fitting sanction.” 15 U.S.C. § 78 o–3(b)(7). However, there is no express statutory authority for SRO's to bring judicial actions to enforce the collection of fines.⁶

In the present context the omission is not insignificant. The core issue, of course, is congressional intent, Touche Ross & Co. v. Redington, 442 U.S. 560, 568, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979), and, in the discussion that follows, we explain why we believe that Congress did not intend to empower FINRA to bring judicial actions to enforce its fines.

The statutory scheme carefully particularizes an array of available remedies, including permissible actions in the federal courts. These include, of course, a variety of actions by private parties for damages. 15 U.S.C. §§ 77k–77 l, 78i(f), 78t(b); see Redington, 442 U.S. at 571–72, 99 S.Ct. 2479 (discussing generally private rights of action in the Securities Exchange Act).

Also, Section 21(d) of the Exchange Act provides express statutory authority for...