John J. Fiero and Fiero Brothers, Inc. v. FINRA, No. 09-1556 (2d Cir. 2011)
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Plaintiffs appealed from a dismissal of their complaint, which sought a declaratory judgment that, inter alia, the Financial Industry Regulatory Authority, Inc. (FINRA) lacked the authority to bring court actions to collect disciplinary fines as imposed. The court held that the heavy weight of evidence suggested that Congress did not intend to empower FINRA to bring court proceedings to enforce its fines and that the 1990 Rule Change did not authorize FINRA to judicially enforce the collection of its disciplinary fines.
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09-1556-cv (L) John J. Fiero and Fiero Brothers, Inc. v. FINRA 1 UNITED STATES COURT OF APPEALS 2 FOR THE SECOND CIRCUIT 3 August Term, 2009 4 (Argued: April 6, 2010 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Decided: October 5, 2011) Docket Nos. 09-1556-cv(L), 09-1863-cv(XAP) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - JOHN J. FIERO and FIERO BROTHERS, INC., Plaintiffs-Counter-Defendants-Appellants-CrossAppellees, v. FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC., Defendant-Counterclaimant-Appellee-CrossAppellant. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - B e f o r e: JACOBS, Chief Judge, WINTER, and WALKER, Circuit Judges. Appeal from orders of the United States District Court for 24 the Southern District of New York (Victor Marrero, Judge) 25 dismissing a complaint seeking a declaratory judgment, and 26 entering a money judgment on a counterclaim. 27 is whether the Financial Industry Regulatory Authority, Inc. has 28 the authority to bring court actions to collect disciplinary 29 fines. We hold that it does not and reverse. 30 31 1 The principal issue 1 2 3 4 5 6 7 8 9 10 11 12 13 BRIAN D. GRAIFMAN, Gusrae, Kaplan, Bruno & Nusbaum, PLLC, New York, N.Y., for Plaintiffs-CounterDefendants-Appellants-CrossAppellees. TERRI L. REICHER, Financial Industry Regulatory Authority, Inc., Washington, D.C., for Defendant-Counterclaimant-AppelleeCross-Appellant. WINTER, Circuit Judge: 14 John J. Fiero ( Fiero ) and Fiero Brothers, Inc. ( Fiero 15 Brothers ) (together, Fieros ) appeal from Judge Marrero s 16 dismissal of their complaint, which sought a declaratory judgment 17 that, inter alia, the Financial Industry Regulatory Authority, 18 Inc. ( FINRA ) lacks the authority to bring court actions to 19 collect disciplinary fines it has imposed. 20 lacks such authority. 21 complaint and vacate the money judgment on FINRA s counterclaim. We hold that FINRA We therefore reverse the dismissal of the 22 23 24 BACKGROUND a) FINRA s Role 25 FINRA is a self-regulatory organization ("SRO") as a 26 national securities association registered with the SEC pursuant 27 to the Maloney Act of 1938, 15 U.S.C. § 78o-3, et seq. 28 Desiderio v. Nat l Ass'n of Sec. Dealers, Inc., 191 F.3d 198, 201 29 (2d Cir. 1999). 30 Association of Securities Dealers ( NASD ).1 See FINRA is the successor to the National It is responsible 1 FINRA is a non-profit Delaware corporation that was formed in July 2007, when the National Association of Securities Dealers, Inc. ( NASD ) consolidated with the regulatory arm of the New York Stock Exchange. See 2 1 for conducting investigations and commencing disciplinary 2 proceedings against [FINRA] member firms and their associated 3 member representatives relating to compliance with the federal 4 securities laws and regulations." 5 NASD Regulation, Inc., 279 F.3d 155, 157 (2d Cir. 2002) (quoting 6 Datek Sec. Corp. v. Nat l Ass n of Sec. Dealers, Inc., 875 F. 7 Supp. 230, 232 (S.D.N.Y. 1995) (internal quotation marks 8 omitted)). 9 with the public must be members of FINRA. D.L. Cromwell Invs., Inc. v. As a practical matter, all securities firms dealing See Sacks v. SEC, 648 10 F.3d 945, 948 (9th Cir. 2011) (citing 72 Fed. Reg. 42,169, 42,170 11 (Aug. 1, 2007); 15 U.S.C. §§ 78c(a)26, 78s(b)) (noting that FINRA 12 is responsible for regulatory oversight of all securities firms 13 that do business with the public ); see also note 1, supra. 14 FINRA s disciplinary proceedings are governed by the FINRA Code 15 of Procedure ("FINRA COP").2 16 the SEC, as required by Section 19 of the Securities Exchange Act 17 of 1934. 18 for approval of proposed SRO rule changes). 19 The FINRA COP has been approved by 15 U.S.C. § 78s(b) (describing the required procedure FINRA has the power to initiate a disciplinary proceeding Standard Inv. Chartered, Inc. v. Nat l Ass'n of Sec. Dealers, Inc., 637 F.3d 112, 114 (2d Cir. 2011). As a result of this consolidation, FINRA is the sole SRO providing member firm regulation for securities firms that conduct business with the public in the United States. Fin. Indus. Regulatory Auth., Inc. v. Fiero, 882 N.E.2d 879, 880 n.* (N.Y. 2008). Much of the facts and background in this case occurred prior to July 2007, so we will refer to the appellee as the NASD where appropriate. The distinction is, however, irrelevant to the merits and our disposition of the case. 2 The entire FINRA COP is contained in the FINRA Manual available at http://finra.complinet.com. 3 1 against any FINRA member or associated person for violating any 2 FINRA rule, SEC regulation, or statutory provision. 3 78s(h)(3). 4 Enforcement or Department of Market Regulation must obtain 5 authorization from the FINRA Regulation Board or FINRA Board. 6 FINRA COP § 9211. 7 conducts a hearing and issues a decision. 8 decisions of the hearing panel may be appealed to the FINRA 9 National Adjudicatory Council ("NAC"), which can affirm, modify, Id. § To issue a complaint, FINRA s Department of After a complaint is filed, a hearing panel Id. § 9231. Final 10 or reverse the hearing panel's decision. 11 9268-9269. 12 pursuant to 15 U.S.C. § 78s(d), and from the SEC to the United 13 States Court of Appeals, pursuant to 15 U.S.C. § 78y. 15 U.S.C. 14 §§ 78s(d), 78y(a); see also Mister Discount Stockbrokers v. SEC, 15 768 F.2d 875, 876 (7th Cir. 1985). 16 17 18 b) 19 firm and broker-dealer registered with the SEC. 20 was the sole registered representative of Fiero Brothers. 21 such, the Fieros were subject to the regulations and discipline 22 of NASD. 23 Id. §§ 9311, 9349(a), NAC decisions may then be appealed to the SEC, The Disciplinary Action Against the Fieros Fiero Brothers, a New York corporation, was a FINRA member John J. Fiero As On February 6, 1998, NASD s Department of Enforcement 24 initiated disciplinary proceedings against the Fieros, the merits 25 of which are not pertinent to this appeal. 26 an NASD hearing panel held that the Fieros had violated Section 27 10(b) of the Exchange Act, Rule 10b-5, and FINRA Conduct Rules 4 On December 6, 2000, 1 2110, 2120, and 3370. 2 barred Fiero from associating with any FINRA-member firm in any 3 capacity, and fined the Fieros $1,000,000 plus costs, jointly and 4 severally. 5 The hearing panel expelled Fiero Brothers, On appeal, the NAC affirmed the hearing panel s decision in 6 its entirety. 7 CAF980002, 2002 WL 31476976, at *34 (Oct. 28, 2002). 8 did not appeal the NAC s decision to the SEC. 9 c) 10 John Fiero, Nat l Adjudicatory Council No. The Fieros State Court Proceedings After the Fieros refused to pay the fine, FINRA commenced an 11 action on December 22, 2003, in New York Supreme Court. Fin. 12 Indus. Regulatory Auth., Inc. v. Fiero, 882 N.E.2d 879, 880-81 13 (N.Y. 2008). 14 that "NASD s claim [was] firmly based on ordinary principles of 15 contract law" because the Fieros had "expressly agreed to comply 16 with all NASD rules, including the imposition of fines and 17 sanctions" when they voluntarily executed the NASD registration 18 forms. 19 Slip Op. 30161 [U], at 2, 2005 WL 6012105 (Sept. 12, 2005). 20 Supreme Court further stated that "New York state courts have 21 long recognized the right of a private membership organization to 22 impose fines on its members, when authorized to do so by statute, 23 charter or by-laws," and that "NASD is not just a private club,' 24 but a self-regulatory organization, federally-mandated under . . 25 . the Exchange Act to discipline its members and enforce the On September 12, 2005, the Supreme Court concluded Nat l Ass'n of Sec. Dealers, Inc. v. Fiero, 2005 N.Y. 5 The 1 federal securities laws as well as its own SEC-approved rules." 2 Id. at 4-5. 3 a judgment of $1,329,724.54. 4 v. Fiero, 2006 N.Y. Slip Op. 30302 [U], 2006 WL 5251396 (May 11, 5 2006). 6 On May 11, 2006, the Supreme Court awarded the NASD Nat l Ass'n of Sec. Dealers, Inc. The First Department of the New York Appellate Division 7 affirmed the Supreme Court s decision. 8 Dealers, Inc. v. Fiero, 827 N.Y.S.2d 4, 5 (1st Dep t 2006). 9 New York Court of Appeals granted the Fieros leave to appeal, and 10 on February 7, 2008, reversed on the ground that the state courts 11 lacked subject matter jurisdiction. 12 The court explained that the FINRA complaint constituted an 13 action to enforce a liability or duty created under the Exchange 14 Act, and therefore, fell within the exclusive jurisdiction of the 15 federal courts pursuant to 15 U.S.C. § 78aa. 16 d) 17 Nat l Ass n of Sec. The Fiero, 882 N.E.2d at 881-82. Id. at 882. Federal Court Proceedings On February 8, 2008, the day after the New York Court of 18 Appeals issued its ruling, the Fieros filed the instant action 19 seeking a declaratory judgment that, inter alia, FINRA has no 20 authority to collect fines through judicial proceedings.3 21 thereafter filed a counterclaim, seeking to enforce the fine 22 under a breach of contract theory. 3 FINRA Both parties moved to dismiss Even prior to the Court of Appeals' ruling, the Fieros had brought an action in the Southern District, which has been voluntarily dismissed without prejudice pursuant to Fed. R. Civ. P. 41(a). 6 1 the complaint and counterclaim, respectively. 2 On March 30, 2009, the district court granted FINRA's motion 3 to dismiss the Fieros' claim, denied the Fieros' motion to 4 dismiss FINRA's counterclaim, and instructed the clerk to enter 5 judgment in favor of FINRA.4 6 DISCUSSION 7 We review a district court s grant of a motion to dismiss de 8 novo. Chase Grp. Alliance v. City of N.Y. Dep t of Fin., 620 9 F.3d 146, 150 (2d Cir. 2010). Our review of a district court s 10 legal conclusions, including the interpretation of a federal 11 statute, is also de novo. 12 503 (2d Cir. 2010).5 United States v. Fuller, 627 F.3d 499, 4 However, the court's order did not specify the amount of the judgment. On April 2, 2009, the district court issued a more detailed decision and order, setting forth its findings, reasoning, and conclusions as to the earlier judgment, but similar to its earlier order, this decision did not specifically direct entry of a judgment for a specific amount of money. Fiero v. Fin. Indus. Regulatory Auth., Inc., 606 F. Supp. 2d 500 (S.D.N.Y. 2009). The Fieros and FINRA both timely filed their notices of appeal on April 14, 2009 and April 29, 2009, respectively. On April 17, 2009, the district court requested a limited remand to correct the omission of the judgment amount. On July 15, 2009, we granted the district court's request, and, thereafter the district court directed the clerk to enter a judgment in favor of FINRA in the amount of $1,010,809.25 with costs and interest. Both parties made timely requests to reinstate the appeals, which we granted on August 12, 2009. 5 Although both parties had agreed that federal jurisdiction existed, the district court sua sponte decided that it lacked federal question jurisdiction under 28 U.S.C. § 1331, but had diversity jurisdiction under 28 U.S.C. § 1332. Fiero, 606 F. Supp. 2d at 509. We disagree with the district court s conclusion that it lacked federal question jurisdiction. For jurisdiction to arise under Section 1331, the claim as stated in the complaint must arise[] under the Constitution or laws of the United States. S. New England Tel. Co. v. Global NAPs Inc., 624 F.3d 123, 132 (2d Cir. 2010) (quoting Carlson v. Principal Fin. Grp., 320 F.3d 301, 306 (2d Cir. 2003) (internal quotation mark omitted)). The Fieros seek a declaratory judgment under 28 U.S.C. § 2201, that FINRA has no authority to obtain a money judgment based on a disciplinary fine imposed pursuant to FINRA s powers under the Exchange Act. See Compl. ¶¶ 1, 16, and 30. On its face, the complaint states a claim under the Exchange Act. We have federal question jurisdiction to determine whether FINRA has authority to collect through 7 1 The Fieros argue that while the Exchange Act and FINRA s 2 rules and bylaws authorize FINRA to impose sanctions on its 3 members, it has no authority to bring judicial actions to collect 4 monetary sanctions. 5 under the Exchange Act and from a FINRA rule submitted to, and 6 not disapproved by, the SEC in 1990 ( 1990 Rule Change ). 7 Notice of Filing and Immediate Effectiveness of Proposed Rule 8 Change by NASD Relating to the Collection of Fines and Costs in 9 Disciplinary Proceedings, Exchange Act SEC Release No. 28227, 46 FINRA argues that it has this authority See 10 S.E.C. Docket 1049 (July 18, 1990) (hereinafter SEC Notice of 11 1990 Rule Change ). 12 13 14 a) 15 FINRA with the necessary authority. 16 We discuss each argument seriatim. FINRA s Authority Under the Exchange Act The first question is whether the Exchange Act provides We hold that it does not. Under Section 15A(b) of the Exchange Act, SRO s have a 17 statutory authority and obligation to appropriately 18 discipline[] their members for violation of any provision of the 19 Exchange Act, the rules or regulations promulgated thereunder, or 20 their own rules, by expulsion, suspension, limitation of 21 activities, functions, and operations, fine, censure, being 22 suspended or barred from being associated with a member, or any judicial proceedings fines levied pursuant to the Exchange Act. See Franchise Tax Bd. v. Constr. Laborers Vacation Trust, 463 U.S. 1, 19 n.19 (1983) (explaining that federal question jurisdiction exists over a declaratory judgment action if, inter alia, the defendant could have brought a coercive claim under federal law against the plaintiff); see also Carlson, 320 F.3d at 307 (holding that the district court has subject matter jurisdiction because it is clear that the complaint, on its face, seeks relief under ERISA ). 8 1 other fitting sanction. 2 there is no express statutory authority for SRO s to bring 3 judicial actions to enforce the collection of fines.6 4 15 U.S.C. § 78o-3(b)(7). However, In the present context the omission is not insignificant. 5 The core issue, of course, is congressional intent, Touche Ross & 6 Co. v. Redington, 442 U.S. 560, 568 (1979), and, in the 7 discussion that follows, we explain why we believe that Congress 8 did not intend to empower FINRA to bring judicial actions to 9 enforce its fines. 10 The statutory scheme carefully particularizes an array of 11 available remedies, including permissible actions in the federal 12 courts. 13 private parties for damages. 14 78t(b); see Redington, 442 U.S. at 571-72 (discussing generally 15 private rights of action in the Securities Exchange Act). 16 These include, of course, a variety of actions by 15 U.S.C. §§ 77k-77l, 78i(f), Also, Section 21(d) of the Exchange Act provides express 17 statutory authority for the SEC to seek judicial enforcement of 18 penalties. 19 may in its discretion bring an action to enjoin any person who 20 is engaged or is about to engage in acts or practices 21 constituting a violation of, inter alia, any provision of the 22 Exchange Act, the rules or regulations thereunder, or the rules See 15 U.S.C. § 78u(d). 6 More specifically, the SEC It is worth noting that the power granted to SRO s by Section 15A of the Exchange Act to discipline their members applies to all SRO s, and not just FINRA. 9 1 of a national securities exchange or registered securities 2 association of which such person is a member from such practices. 3 Id. § 78u(d)(1). 4 seek monetary penalties for violations of the Exchange Act, the 5 rules and regulations promulgated thereunder, or for the 6 violation of a cease and desist order. 7 Under Section 21(e) of the Exchange Act, the SEC may also seek 8 writs of mandamus, injunctions, and orders from the federal 9 courts commanding any person to comply with, inter alia, the 10 provisions of [the Exchange Act], the rules, regulations, and 11 orders thereunder, the rules of a national securities exchange or 12 registered securities association of which such person is a 13 member or person associated with a member . . . . 14 Under Section 21(f), however, the SEC is prohibited from bringing 15 any action pursuant to subsection (d) or (e) of this section 16 against any person for violation of, or to command compliance 17 with, the rules of a self-regulatory organization . . . unless it 18 appears to the Commission that (1) such self-regulatory 19 organization . . . is unable or unwilling to take appropriate 20 action against such person in the public interest and for the 21 protection of investors, or (2) such action is otherwise 22 necessary or appropriate in the public interest or for the 23 protection of investors. Moreover, the SEC has explicit authority to Id. § 78u(d)(3)(A). Id. § 78u(e). Id. § 78u(f).7 7 The SEC takes the position that it has the authority to bring an action in a federal district court to enforce any order it issues that affirms sanctions, including fines, imposed by FINRA. See Delegation of Authority to the Office of the General Counsel, SEC Release No. 42,488, 71 S.E.C. Docket 10 1 Therefore, when Congress passed the Exchange Act, and to 2 this date, Sarbanes-Oxley Act of 2002, § 3(b), (amending 15 3 U.S.C. § 78u); Dodd-Frank Wall Street Reform Act, Pub. L. No. 4 111-203, § 929P, 124 Stat. 1376, 1862-63 (2010) (amending 15 5 U.S.C. § 78u), it was well aware of how to grant an agency access 6 to the courts to seek judicial enforcement of specific sanctions, 7 including monetary penalties. 8 e.g., SEC v. Rosenthal, Nos. 10-1204-cv(L); 10-1253 (con.), 2011 9 WL 2271743 (2d Cir. June 9, 2011); SEC v. Tx. Gulf Sulphur Co., 10 11 15 U.S.C. § 78u(d)(3)(A); see, 446 F.2d 1301, 1307 (2d Cir. 1971). In contrast, there are no explicit provisions in the statute 12 authorizing SRO s to seek judicial enforcement of the variety of 13 sanctions they can impose. 14 Congress did not intend to authorize FINRA to seek judicial 15 enforcement to collect its disciplinary fines. 16 U.S. at 571-72 (not implying a private right of action where 17 elsewhere in the Exchange Act Congress demonstrated the ability 18 and explicit intent to create private rights of action). 19 This is significant evidence that Redington, 442 We need not rely upon negative implications alone, however, 20 because there are statutory provisions that weigh heavily against 21 FINRA s claim of enforcement powers through court actions 22 alleging breach of contract. First, FINRA s sanctions are 1910 (March 2, 2000); 15 U.S.C. § 78u(e)(1). Although several other Courts of Appeals have affirmed the SEC s authority to enforce FINRA-imposed sanctions pursuant to Section 21(e), see, e.g., SEC v. Mohn, 465 F.3d 647, 651-52 (6th Cir. 2006); SEC v. McCarthy, 322 F.3d 650, 655 (9th Cir. 2003); SEC v. Vittor, 323 F.3d 930 (11th Cir. 2003); and Lang v. French, 154 F.3d 217, 222 (5th Cir. 1998), this issue is not before us on this appeal. 11 1 appealable by an aggrieved party to the SEC and thereafter to the 2 United States Courts of Appeals. 3 enforcement, it would surely have provided for some specific 4 relief other than leaving SRO s to commonlaw proceedings in state 5 courts or in federal district courts under diversity 6 jurisdiction.8 7 administrative rules, or enforces its own rules promulgated 8 pursuant to statutory or administrative authority, it is 9 exercising the powers granted to it under the Exchange Act. Had Congress intended judicial Second, where FINRA enforces statutory or 10 Indeed, FINRA s powers in that regard are subject to divestment 11 by the SEC under Section 19(g)(2) of that Act. 12 gave the federal courts exclusive jurisdiction to enforce the 13 Exchange Act, 15 U.S.C. § 78aa, and FINRA s breach of contract 14 theory undermines that provision. 15 actions may bristle with Exchange Act legal issues because the 16 most serious fines levied by FINRA will be for member violations 17 of the Act. 18 violation of Section 10(b) of that Act. 19 of FINRA fines might well, therefore, entail interpretation of 20 the Exchange Act notwithstanding the exclusive jurisdiction of 21 the federal courts. 22 However, Congress FINRA contract enforcement For example, the Fieros were charged with a State court enforcement One might argue that an inference of congressional intent to 8 One court has even held that NASD is not an aggrieved person in a Court of Appeals review proceeding, and that NASD was thus unable to bring a petition for review of an SEC decision vacating an NASD disciplinary decision. Nat l Ass n of Sec. Dealers, Inc. v. SEC, 431 F.3d 803, 809-10 (D.C. Cir. 2005). 12 1 authorize such legal actions by FINRA can be drawn from the 2 seemingly inexplicable nature of a gap in the FINRA enforcement 3 scheme: 4 does not support an inference of inadvertent omission because 5 significant underenforcement of the securities laws and FINRA 6 rules is hardly the inevitable result of FINRA s inability to 7 bring fine-enforcement actions. 8 by a draconian sanction not involving court action. 9 deal in securities with the public without being a member of fines may be levied but not collected. However, the gap FINRA fines are already enforced One cannot 10 FINRA. 11 can revoke the member s registration, resulting in exclusion from 12 the industry. 13 the Exchange Act, the violator will also face a panoply of 14 private and SEC remedies. 15 78j(b). 16 When a member fails to pay a fine levied by FINRA, FINRA Moreover, where a fine is based on a violation of See, e.g., 15 U.S.C. §§ 77k-77l, 78i, Finally, our conclusion is amply supported by NASD s 17 longstanding practices. It has always relied exclusively upon 18 its powers to revoke the registration of or deny reentry into the 19 industry to punish members who do not comply with sanctions. 20 U.S. Gen. Accounting Office, SEC and CFTC: 21 But Improvements Needed in the Use of Treasury s Collection 22 Service 11 (2001). 23 that the NASD sought to enforce fines or any other sanction 24 through judicial actions in its own right. 25 SRO) may never even have claimed to have the power to do so until Most Fines Collected, So far as we can tell, it was not until 1990 13 NASD (or any other 1 1990. In that year, as discussed infra, NASD proposed a rule and 2 successfully asked the SEC not to disapprove it. 3 notified the public of a new NASD policy of bringing court 4 actions in its name to collect fines. 5 90-21, available at 6 http://www.finra.org/Industry/Regulation/Notices/Pre-1996/. This 7 rule, and its effect, are discussed in the next subsection. And, 8 even after the change in policy in 1990 -- the effect of which 9 turns in part on the question of statutory authority -- the The rule NASD, Notice to Members 10 action against the Fieros is said to be the first case brought 11 under that policy. 12 Appellant s Br. at 10. Such a longstanding practice supports an inference that NASD 13 believed that it lacked judicial enforcement power. 14 Supreme Court has stated, 15 16 17 18 19 20 21 22 23 24 As the Authority actually granted by Congress of course cannot evaporate through lack of administrative exercise. But just as established practice may shed light on the extent of power conveyed by general statutory language, so the want of assertion of power by those who presumably would be alert to exercise it, is equally significant in determining whether such power was actually conferred. 25 Fed. Trade Comm'n v. Bunte Bros., 312 U.S. 349, 352 (1941); see 26 also Bankamerica Corp. v. United States, 462 U.S. 122, 131 (1983) 27 (finding that the Government's failure for over 60 years to 28 exercise the power it now claims . . . strongly suggests that it 29 did not read the statute as granting such power ). 30 Moreover, NASD s longstanding reliance upon these other 14 1 substantial enforcement methods was known to Congress, and 2 Congress left that reliance unaltered. 3 further indicates that FINRA is not authorized to enforce the 4 collection of its fines through the courts. 5 Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 381-82 6 (1982) (noting that an implied cause of action under the 7 [Commodities Exchange Act] was a part of the contemporary legal 8 context in which Congress legislated, and that [i]n that 9 context, the fact that a comprehensive reexamination and This lack of action See Merrill Lynch, 10 significant amendment of the [Commodities Exchange Act] left 11 intact the statutory provisions under which the federal courts 12 had implied a cause of action is itself evidence that Congress 13 affirmatively intended to preserve that remedy (internal 14 citations omitted)). 15 Merrill Lynch in that a failure to bring actions, rather than the 16 bringing of actions, was involved, but the principle of 17 congressional acquiescence is the same. The situation here is different from 18 In sum, the issue is one of legislative intent, and we 19 conclude that the heavy weight of evidence suggests that Congress 20 did not intend to empower FINRA to bring court proceedings to 21 enforce its fines. 22 23 24 b) 25 filed a rule with the SEC pursuant to Section 19(b)(1) of the 26 Exchange Act. FINRA s Authority Under the 1990 Rule On April 10, 1990, and as amended on June 20, 1990, FINRA Self-Regulatory Organizations; Notice of Filing 15 1 and Immediate Effectiveness of Proposed Rule Change by National 2 Association of Securities Dealers, Inc. Relating to the 3 Collection of Fines and Costs in Disciplinary Proceedings, 4 Exchange Act Release No. 28227, 46 SEC Docket 1049 (July 18, 5 1990), 1990 WL 320480. 6 the NASD intends to pursue other available means for the 7 collection of fines and costs imposed . . . in disciplinary 8 decisions on or after July 1, 1990. 9 advised that should its own internal efforts for the collection The proposal provided notification that Id. at *1. The NASD 10 of fines . . . fail, it may refer a matter to external 11 collection agencies and in appropriate situations, . . . seek to 12 reduce such fines to a judgment. 13 SEC filing, the NASD issued a notice to its members in April 14 1990, informing them of its new policy and outlining how the 15 policy would be implemented. 16 available at 17 http://www.finra.org/Industry/Regulation/Notices/Pre-1996/. 18 notice became effective on July 1, 1990. 19 NASD will not pursue the collection of fines and costs assessed 20 in cases concluded prior to July 1, 1990 ). 21 Id. at *1 n.2. Along with its See NASD, Notice to Members 90-21, The Id. (noting that the In October 1999, NASD sent a second notice to its members 22 notifying them that it would pursue the collection of any fine 23 in sales practice cases, even if an individual is barred, if 24 . . . there has been widespread, significant, and identifiable 25 customer harm; or the respondent has retained substantial 16 1 ill-gotten gains. 9 2 http://www.finra.org/Industry/Regulation/Notices/1999/p004067. 3 NASD, Notice to Members 99-86, available at FINRA claims that the 1990 Rule Change constitutes authority 4 for judicial enforcement of its fines. 5 of an exaggeration. 6 to be newly granted authorization from the SEC to FINRA to bring 7 such judicial actions. 8 existing power and to serve only as a notice of a new policy 9 under that power. 10 This claim is something The 1990 Rule Change does not even purport Rather, it appears to assume a pre- Having found no such pre-existing power, we may nevertheless 11 assume for purposes of analysis that the 1990 Rule Change, if 12 properly obtained, constitutes such authorization.10 13 for FINRA to have obtained authority under the 1990 Rule Change 14 to enforce the collection of its disciplinary fines through 15 judicial proceedings, the rule must have been properly 16 promulgated under the procedures established by the Exchange Act. 17 It was not. 18 However, Section 19(b) of the Exchange Act establishes the mechanism 19 by which SRO s can change their governing rules. See 15 U.S.C. § 20 78s(b). 21 rule change with the SEC, accompanied by a concise general To initiate the process, an SRO must file any proposed 9 This second notice to members was issued after the NASD enforcement action against the Fieros was initiated, but before the Fieros chose not to pursue an appeal to the SEC. 10 We of course intimate no opinion on the validity of a properly promulgated rule authorizing fine collection through judicial proceedings. 17 1 statement of the basis and purpose of such proposed rule change. 2 Id. § 78s(b)(1).11 3 the proposed rule change and give interested individuals an 4 opportunity to comment prior to either approving or disapproving 5 the rule. 6 The SEC is then required to publish notice of Id. Under this system, established by Congress in 1975, all new 7 substantive rules and modification of existing rules for SRO s 8 must go through a notice and comment period and obtain SEC 9 approval before becoming effective. Securities Acts Amendments 10 of 1975, Pub. L. No. 94-29, 89 Stat. 97 (codified as amended at 11 15 U.S.C. §§ 78a to 80b-4 (1975)); Credit Suisse First Boston 12 Corp. v. Grunwald, 400 F.3d 1119, 1130 (9th Cir. 2005). 13 substantive rule -- or legislative one, as it is sometimes called 14 in this Circuit -- creates new law, right, or duties, in what 15 amounts to a legislative act. 16 Saranac Power Partners, L.P., 267 F.3d 128, 131 (2d Cir. 2001) 17 (citations and internal quotation mark omitted) (defining 18 substantive rule in the context of the Administrative Procedure 19 Act). A N.Y. State Elec. & Gas Corp. v. 20 Congress also included an exception to the comment and 21 notice requirement of § 19(b)(1) for House-Keeping rules and 22 other rules which do not substantially affect the public interest 11 Congress s intention in adopting § the same standards of policy justification Act imposes on the SEC. S. REP. No. 94-75 U.S.C.C.A.N. 179, 207-08, 1975 WL 12347, at 18 19(b)(1) was to impose on SRO s that the Administrative Procedure (1975), reprinted in 1975 *29. 1 or the protection of investors. 2 (comments of Sen. Harrison Williams); see also Saranac Power 3 Partners, 267 F.3d at 131 (defining interpretive rules as those 4 which do not create rights, but merely clarify an existing 5 statute or regulation (citations and internal quotation marks 6 omitted)); Grunwald, 400 F.3d at 1130 n.11. 7 changes take immediate effect upon filing with the SEC. 8 U.S.C. § 78s(b)(3)(A). 9 effective on filing with the SEC if the SRO designates the 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 121 Cong. Rec. 700-183 (1975) Such proposed rule 15 In particular, the rule change becomes proposed rule as: (i) constituting a stated policy, practice, or interpretation with respect to the meaning, administration, or enforcement of an existing rule of the self-regulatory organization, (ii) establishing or changing a due, fee, or other charge imposed by the self-regulatory organization on any person, whether or not the person is a member of the self-regulatory organization, or (iii) concerned solely with the administration of the self-regulatory organization or other matters which the Commission [may specify]. Id. In proposing the 1990 Rule Change, the NASD designated it as 27 such a House-Keeping rule, one constituting a stated policy 28 with respect to the enforcement of an existing rule of the NASD 29 under § 19(b)(3)(A)(i) of the [Exchange] Act. 30 Regulatory Organizations; Notice of Filing and Immediate 31 Effectiveness of Proposed Rule Change by National Association of 32 Securities Dealers, Inc. Relating to the Collection of Fines and 33 Costs in Disciplinary Proceedings, Exchange Act Release No. 19 See Self- 1 28227, 46 SEC Docket 1049 at *1, 1990 WL 320480. 2 was to become effective upon the SEC s receipt of the filing. 3 U.S.C. § 78s(b)(3)(A). 4 Thus, the rule 15 We, however, are not bound by the NASD s characterization as 5 to whether the 1990 Rule Change affected the substantive rights 6 of members. 7 175, 182 (2d Cir. 2009) (" The particular label placed upon [an 8 order] by [an agency] is not necessarily conclusive, for it is 9 the substance of what the [agency] has purported to do and has Brodsky v. U.S. Nuclear Regulatory Comm'n, 578 F.3d 10 done which is decisive. " (quoting Columbia Broad. Sys., Inc. v. 11 United States, 316 U.S. 407, 416 (1942))). 12 Prior to the 1990 Rule Change, as discussed, there was no 13 existing SEC rule or statute that authorized the NASD to initiate 14 judicial proceedings to enforce the collection of its 15 disciplinary fines. 16 practice of not seeking to enforce collection through judicial 17 actions. 18 did not rely on it to ask courts to enter judgments based on its 19 disciplinary fines. 20 assistance in obtaining court orders to direct violators owing 21 NASD fines to pay these amounts. 22 Office, SEC and CFTC: 23 Needed in the Use of Treasury s Collection Service 11 (2001). 24 response, the SEC agreed to seek court orders under Exchange Act 25 § 21(e)(1) to enforce the NASD s disciplinary fines, but only for Furthermore, the NASD had a longstanding Indeed, even subsequent to the 1990 Rule Change, NASD For example, in 1998, it sought the SEC s See U.S. Gen. Accounting Most Fines Collected, But Improvements 20 In 1 cases that it affirmed on appeal and that met other specific 2 requirements. Id. 3 This background and the various statutory provisions 4 discussed above demonstrate that the 1990 Rule Change was not 5 simply a stated policy change under 15 U.S.C. § 78s(b)(3)(A) that 6 could bypass the required notice and comment period of Section 7 19(b). 8 rights of barred and suspended members to stay out of the 9 industry and not pay the fines imposed on them in prior Rather, it was a new substantive rule that affected the 10 disciplinary proceedings. 11 file the new substantive rule with the SEC under 15 U.S.C. § 12 78s(b)(1) for publication of a notice and comment period. 13 Because the NASD improperly designated the 1990 Rule Change, it 14 was never properly promulgated and cannot authorize FINRA to 15 judicially enforce the collection of its disciplinary fines. 16 As a result, the NASD was required to CONCLUSION 17 For the foregoing reasons, we reverse the judgment 18 dismissing the appellants declaratory judgment complaint and 19 vacate the judgment entered in favor of the appellee. 20 21
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