Thursday, January 12, 2023
Last year, I covered a lawsuit challenging FINRA's constitutional status and the top-notch lawyers FINRA hired to defend it. Since then, FINRA has filed its motion to dismiss. You can read it yourself here if you're interested. The plaintiffs have until January 30th to respond.
My sense after reading it is that FINRA would prefer to shift the focus off itself and keep the court's attention on the plaintiffs' tattered regulatory history. The initial robust defense argues that the case should be dismissed for purported jurisdictional, venue, and standing flaws. The first seventeen and a half pages of the motion to dismiss focus on these arguments and a review of the plaintiffs. As a matter of litigation strategy, taking these shots early makes sense to me. If the arguments succeed, they'll knock the case out entirely.
The final seven pages make the case for FINRA's constitutional status. It argues that: (1) FINRA is a private entity exempt from separation of powers or appointments clause issues; and (2) that no non-delegation doctrine violation has occurred because the SEC supervises FINRA.
It'll be interesting to see how these arguments hold up, if Judge Scriven ever reaches them. On the whole, the arguments so far seem to center around the issues I highlighted in my article warning about the possibility of these kinds of challenges for SROs.
For example, FINRA argues that it shouldn't be deemed a part of government because FINRA wasn't created by the government. It relies in part on the Amtrak case, Lebron v. NationalRailroad Passenger Corp., 513 U.S. 374 (1995), for the proposition that only corporations “create[d]” by the government “for the furtherance of government objectives” will qualify as arms of the government.
I discussed this issue in my article, and took the view that:
Drawing a constitutional line between whether these entities are government-created entities or government-authorized entities does not relate to the core concern animating Free Enterprise Fund. Whether an entity is chartered under state law or is federally created has no bearing on whether the President is “stripped of the power . . . and his ability to execute the laws—by holding his subordinates accountable for their conduct.” The precise method of creation of an SRO does not relate to the underlying separation of powers concerns.
The brief also argues that FINRA's power is a permissible delegation. I'm less confident about the scope of appropriate delegation with the post-Trump era Supreme Court. My point here isn't to say that one side or the other is right, but that there is real uncertainty about how far the Supreme Court will push on non-delegation issues. It's going to be an interesting case to follow.