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

• Decision Date: 20 October 2017
• Docket Number: D071392
• Citation: 224 Cal.Rptr.3d 717,16 Cal.App.5th 946
• Court: California Court of Appeals
• Parties: Troy FLOWERS, Plaintiff and Appellant, v. FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC., Defendant and Respondent.

16 Cal.App.5th 946

224 Cal.Rptr.3d 717

Troy FLOWERS, Plaintiff and Appellant,

v.FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC., Defendant and Respondent.

D071392

Court of Appeal, Fourth District, Division 1, California.

Filed October 20, 2017

McColloch Law Firm, Maria E. Saling and Michael T. McColloch, Carlsbad, for Plaintiff and Appellant.

Gibson, Dunn & Crutcher, Los Angeles, and Ethan D. Dettmer, San Francisco, for Defendant and Respondent.

BENKE, J.

In the period between 2000 and 2001, plaintiff and appellant Troy Flowers's application for a securities sales license was rejected by Ohio state officials because they found that he was "not of ‘good business repute.’ " In addition, Flowers was subjected to discipline by securities regulators with respect to his violation of securities laws and regulations and his failure to cooperate in a securities investigation. A publicly accessible record of this disciplinary history is maintained by defendant and respondent, the Financial Industry Regulatory Authority, Inc. (FINRA).

Flowers filed a complaint against FINRA in which he sought an order requiring that FINRA expunge his disciplinary history from its records. The trial court sustained without leave to amend FINRA's demurrer to Flowers's complaint. Because federal securities laws and regulations provide Flowers with a process by which he may challenge FINRA's publication of his disciplinary history, and Flowers has not pursued that process, he may not now, by way of a civil action, seek that relief from the trial court. Accordingly, we affirm the trial court's order sustaining the demurrer and its judgment in favor of FINRA.

FACTUAL AND PROCEDURAL BACKGROUND

Although FINRA is a private, not-for-profit Delaware corporation, it is also a self-regulatory organization (SRO) authorized under title 15 United States Code section 78o -3 et seq. (The Maloney Act, amending the Securities Exchange Act of 1934 (the Exchange Act)); as such, it is registered with the federal Securities and Exchange Commission (SEC) as a national securities association. Prior to 2007, FINRA was known as the National Association of Securities Dealers (the NASD); in 2007, the NASD consolidated its regulatory functions with the regulatory functions NYSE Regulation, Inc. provided for the New York Stock Exchange and changed its name to FINRA. (See In re Series 7 Broker Qualification Exam Scoring Litigation (D.D.C. 2007) 510 F.Supp.2d 35, 36, fn.1, aff'd (D.C. Cir. 2008) 548 F.3d 110.)

In its role as an SRO, FINRA is subject to extensive oversight by the SEC. (See 15 U.S.C. § 78s ; First Jersey Securities, Inc. v. Bergen (3d Cir. 1979) 605 F.2d 690, 693, cert. denied, First Jersey Securities, Inc. v. Biunno , 444 U.S. 1074, 100 S.Ct. 1020, 62 L.Ed.2d 756 (1980).) FINRA disciplines its members when it has determined they have violated securities laws and regulations or FINRA's own rules. ( 15 U.S.C. § 78s.) The Exchange Act itself requires that, as an SRO, FINRA maintain information in a central registration depository (CRD) database about its member firms as well as their current and former registered representatives, including their broker representatives. (See 15 U.S.C. § 78o -3(i)(1)(A) ; Santos-Buch v. Fin. Indus. Regulatory Auth. (S.D.N.Y. 2014) 32 F.Supp.3d 475, 479.) Of concern here, the Exchange Act further requires that FINRA publish information about its members' "disciplinary actions, regulatory ... proceedings, and other information required by ... exchange or association rule, and the source and status of such information." ( 15 U.S.C. § 78o -3(i)(5).) FINRA does this through BrokerCheck (https://brokercheck.finra.org), which allows members of the public to search for and review the professional history of individual brokers.

BrokerCheck was established when in 2009, with the SEC's approval, FINRA adopted Rule 8312 of its rules. In approving FINRA Rule 8312, the SEC stated: "BrokerCheck allows the public to obtain certain limited information regarding formerly associated persons, regardless of the time elapsed since they were associated with a member, if they were the subject of any final regulatory action. " ( 75 Fed.Reg. 41254 (July 15, 2010) (italics added).) The SEC noted that former brokers, "although no longer in the securities industry in a registered capacity, may work in other investment-related industries, such as financial planning, or may seek to attain other positions of trust with potential investors." ( Id . at p. 41257.) Thus, on one hand, the SEC found that "[d]isclosure of such person's record while he was in the securities industry via BrokerCheck should help members of the public decide whether to rely on his advice or expertise or do business with him"; on the other hand, it also found that the absence of this information "could lead a person making an inquiry about a formerly associated person to conclude that the formerly associated person had a clean record." ( Ibid . ) The SEC noted that, "if registered persons are aware ... information will be available for a longer period of time, it should provide an additional incentive to act consistent with industry best practices." ( Ibid . ) In describing and approving FINRA's creation and operation of BrokerCheck, the SEC stated: "FINRA has a statutory obligation to make information available to the public and, ... the [SEC] believes that FINRA should continuously strive to improve BrokerCheck because it is a valuable tool for the public in deciding whether to work with an industry member." (Securities and Exchange Com., Release No. 34-61002, (Nov. 13, 2009), 74 Fed.Reg. 61193, 61196 (Nov. 23, 2009).)

Flowers was a registered representative of two NASD member firms from 1995 until 2000, Pacific Cortez Securities Incorporated (also known as La Jolla Capital), and Equitrade Securities Corporation. As such, his regulatory history as a participant in the securities industry is available to the public on BrokerCheck. There is no dispute Flowers's BrokerCheck history states that: in August 2000, the Ohio Division of Securities rejected his application for a securities salesperson license because it found that he was "not of ‘good business repute’ "; that in 2000, he was fined $10,000 by the NASD for engaging with La Jolla Capital in penny stock sales, which did not comply with the Exchange Act and SEC Penny Stock Rules; and that in 2001, the NASD barred Flowers from participating in the securities industry because he failed to timely cooperate with an NASD investigation as required by his firm's membership in the NASD.

By way of the complaint he filed in the trial court against FINRA, Flowers sought an order requiring that FINRA expunge these matters from its database. Flowers alleged that the information about him as disclosed on BrokerCheck was false, inaccurate and misleading. In particular, he alleged that he had never in fact applied for an Ohio sales license, that in 2000, he had accepted the $10,000 fine only because he was leaving the securities business and did not wish to contest the matter, and that he initially had declined to cooperate with NASD's investigation on the advice of counsel and had later agreed to cooperate. Flowers further alleged that although he no longer wishes to act as a securities broker, his BrokerCheck record prevents him from opening a personal securities account and, because it is publicly available, the record inhibits his ability to obtain employment. Given these circumstances, Flowers's complaint alleges that as a matter of equity the three items should be expunged from FINRA's records.

Initially, FINRA removed Flowers's complaint to the United States District Court. However, the district court remanded the case to the trial court, where FINRA filed a demurrer. In support of its demurrer, FINRA asked the trial court to take judicial notice of records with respect to Flowers's Ohio application for a sales license and its own records of the regulatory actions it took against Flowers.¹ FINRA argued Flowers's complaint was barred by the requirement that he exhaust available administrative and judicial remedies and that in any event his claims were preempted by federal securities laws and regulations. The trial court agreed and sustained FINRA's demurrer without leave to amend and entered a judgment in favor of FINRA. Flowers filed a timely notice of appeal.

I

The principles governing our review of orders sustaining a demurrer without leave to amend are well-established. " ‘ "We treat the demurrer as admitting all material facts properly pleaded, but not contentions, deductions or conclusions of fact or law. [Citation.] We also consider matters which may be judicially noticed." [Citation.] Further, we give the complaint a reasonable interpretation, reading it as a whole and its parts in their context. [Citation.] When a demurrer is sustained, we determine whether the complaint states facts sufficient to constitute a cause of action. [Citation.] And when it is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, the trial court has abused its discretion and we reverse; if not, there has been no abuse of discretion and we affirm. [Citations.] The burden of proving such reasonable possibility is squarely on the plaintiff.’ " ( Champion v. County of San Diego (1996) 47 Cal.App.4th 972, 976, 55 Cal.Rptr.2d 205, quoting Blank v. Kirwan (1985) 39 Cal.3d 311, 318, 216 Cal.Rptr. 718, 703 P.2d 58.)

II

We agree with the trial court that Flowers's complaint is barred by the doctrine of exhaustion of remedies. As we explain, our concern here is not so much with the fact that it appears from the record that Flowers could have challenged Ohio's rejection of his sales license, as well as NASD's earlier disciplinary actions administratively and obtained judicial review of any adverse administrative determination² ; rather we are more concerned here with Flowers's ability to seek...