Kim v. Financial Industry Regulatory Authority, Inc.

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
EUGENE H. KIM,
Plaintiff,
v. Civil Action No. 1:23-cv-02420 (ACR)
FINANCIAL INDUSTRY REGULATORY
AUTHORITY, INC.,
Defendant,
UNITED STATES OF AMERICA,
Intervenor.
MEMORANDUM OPINION
In 1790, Philadelphia merchants meeting at a coffee house formed the nation’s first stock
exchange, giving rise to the Philadelphia Stock Exchange. Two years later, New York brokers
meeting under a buttonwood tree negotiated an agreement to regulate traders, giving rise to the
New York Stock Exchange. Since the Republic’s early days, private organizations now known
as self-regulatory organizations or SROs have governed exchanges and regulated brokers. And
since the 1930s, they have done so with statutory recognition and regulatory oversight by the
Securities and Exchange Commission. This case concerns one SRO regulated by the SEC, the
Defendant Financial Industry Regulatory Authority, Inc. (FINRA). Though opportunities have
abounded, no court has ever held that FINRA or its relationship with the SEC is unconstitutional.
Plaintiff Eugene H. Kim, a securities broker registered with FINRA, contends that the
courts have it all wrong. Facing an enforcement action for allegedly unethical conduct, he
1
contends that FINRA either is a state actor bound by Article II’s appointment and removal
requirements, see U.S. Const. art. II, § 1, cl. 1; id. art. II, § 2, cl. 2, or is structured in a way that
violates the private nondelegation doctrine. Either way, he alleges, the enforcement action
violates these and other constitutional provisions and, for added measure, the Sherman Antitrust
Act of 1890, 15 U.S.C. §§ 1–7. He seeks a temporary restraining order and preliminary
injunction enjoining FINRA from proceeding with the enforcement action. See Dkt. 4.
He is not alone. A D.C. Circuit motions panel recently enjoined a different, expedited
FINRA enforcement action based on similar claims. Alpine Sec. Corp. v. Fin. Indus. Regul.
Auth., No. 23-5129, 2023 WL 4703307, at *1 (D.C. Cir. July 5, 2023) (mem.) (per curiam). The
court’s short order held that the appellant had “satisfied the stringent requirements for an
injunction pending appeal.” Id. In a concurring statement, Judge Walker wrote that FINRA
might prevail on the appellant’s Appointments Clause and removal power claims, “but on the
briefing before [him], that seem[ed] unlikely.” Id. at *3 (Walker, J., concurring). Judge Garcia
would not have granted the injunction. The appeal remains pending, with briefing scheduled to
finish on November 17, 2023. Plaintiff argues that the Alpine order, although not binding,
should guide the Court’s decision. Agreed. But the order does not suggest that courts must
enjoin every challenged FINRA enforcement action pending the Alpine merits decision.
The Court must instead apply longstanding precedent and the record before it to assess
this plaintiff’s claims. On precedent, the Court has benefitted from extensive briefing, amicus
briefs, and a multi-hour hearing that all addressed Judge Walker’s well-founded concerns. On
the record, Plaintiff faces a less severe and less imminent harm than the Alpine plaintiff. Alpine
involved an expedited enforcement proceeding “to expel Alpine [Securities Corporation] from
FINRA membership”—a sanction known as “the corporate death penalty”—after FINRA found
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that Alpine violated a cease-and-desist order more than 35,000 times. Scottsdale Cap. Advisors
Corp. v. Fin. Indus. Regul. Auth., Inc., — F. Supp. 3d —, 2023 WL 3864557, at *4 (D.D.C. June
7, 2023). For good reason, Judge Walker repeatedly referenced that FINRA sought, on an
expedited basis, the “corporate death penalty” or to “put [Alpine] out of business.” Alpine, 2023
WL 4703307, at *1–2, *4 (Walker, J., concurring). But here, FINRA is not insisting on the
“corporate death penalty.” Dkt. 25 at 32:1–4. It currently seeks a $30,000 fine and
disgorgement of about $16,000 in profits. Id. at 92:10–11, 92:20–22. And in Alpine, FINRA
had scheduled the enforcement hearing for four days after the district court’s hearing on the
preliminary injunction motion. Scottsdale, 2023 WL 3864557, at *4. The parties here agree that
an enforcement hearing and sanction, if any, are many months—and potentially up to a year—
away. Dkt. 25 at 37:13–17; see Dkt. 11-2 ¶¶ 12, 17.
The Court finds that Plaintiff has not met the high burden for the “extraordinary” relief of
a TRO or preliminary injunction, relief which is “never awarded as of right.” Winter v. NRDC,
Inc., 555 U.S. 7, 24 (2008). First, Plaintiff cannot establish he is likely to succeed on the merits.
Plaintiff’s Article II Appointments Clause and removal power claims require establishing that
FINRA is a state actor, which “clearly requires permanent government control.” Herron v.
Fannie Mae, 861 F.3d 160, 168 (D.C. Cir. 2017) (citing Lebron v. Nat’l R.R. Passenger Corp.,
513 U.S. 374, 398–99 (1995)). But Plaintiff concedes, and the record reflects, that the
government does not control FINRA. On Plaintiff’s private nondelegation claim, the Court finds
that FINRA likely “function[s] subordinately to” the SEC, which has “authority and surveillance
over [its] activities.” Sunshine Anthracite Coal Co. v. Adkins, 310 U.S. 381, 399 (1940). Nor
are Plaintiff’s other claims likely to succeed. Second, Plaintiff does not face irreparable harm.
He faces instead an enforcement hearing, months away, and most likely, monetary fines. Third
3
and fourth, the balance of equities and public interest weigh against granting preliminary
injunctive relief because enjoining this enforcement proceeding would interfere with FINRA’s
regulatory mission and threaten the integrity of U.S. securities markets.
Though a closer call, the equities and public harm factors would lead the Court to deny
Plaintiff’s motion even if it assumed that Plaintiff established a likelihood of success on the
merits and irreparable harm. See Benisek v. Lamone, 138 S. Ct. 1942, 1944 (2018) (per curiam)
(explaining that balance of equities and public interest factors may overcome other two factors
even in cases involving constitutional claims). 1 Reading the Alpine order as effectively halting
all FINRA enforcement actions for now would upend FINRA’s work—a result that would put
investors and U.S. securities markets at risk.
I. BACKGROUND
A. Legal Background and Overview of FINRA
1. History of Self-Regulation in the Securities Industry
It began, as many things do, over cups of joe. In 1790, ten Philadelphia merchants
calling themselves the “Board of Brokers” began trading bank stocks and government securities
out of a local coffee house. Jerry W. Markham & Daniel J. Harty, For Whom the Bell Tolls: The
Demise of Exchange Trading Floors and the Growth of ECNs, 33 J. Corp. L. 865, 868 (2008).
“Within a year, express coaches were speeding to Philadelphia from New York bearing news
from ships docking in the New York port that might affect security prices on the Philadelphia
exchange.” Id. The Philadelphia Stock Exchange, still in existence today, emerged from that
coffee house. See id.1
The Court thanks amici CBOE Global Markets, Inc.; CME Group Inc.; National Futures
Association; and the Securities Exchanges for their insight, in particular into the history of SROs.
See Dkts. 19, 20.
4
Things in New York did not proceed as smoothly. In January 1792, the prices of
government and bank securities soared, “exceeding any sane levels of valuation.” Ron Chernow,
Alexander Hamilton 381 (2004). Then prices started to drop, panic spread, and, natch, prices
plummeted. Id. “[F]inancial mayhem” ensued. Id. New York brokers did not sit idly by. On
May 17, 1792, they gathered “under the shade of a buttonwood tree at 68 Wall Street” and drew
up the aptly named “Buttonwood Agreement.” Id. at 384. It contained rules to govern securities
trading, including setting a minimum for brokers’ commissions. Id. Out of this agreement, the
New York Stock Exchange was born, like the Philadelphia exchange, without aid of any federal
or state law or government intervention, oversight, or regulation. Id. 2
Over a century later, in 1929, there was another market crash. In the aftermath, Congress
acted, including by passing the Securities Exchange Act of 1934, Pub. L. No. 73-291, 48 Stat.
881 (codified as amended at 15 U.S.C. § 78a et seq.). See generally Marianne K. Smythe,
Government Supervised Self-Regulation in the Securities Industry and the Antitrust Laws:
Suggestions for an Accommodation, 62 N.C. L. Rev. 475, 480–83 (1984). The Exchange Act
subjected over-the-counter broker-dealers to direct regulation by the government, specifically the
SEC, for the first time. See Smythe, supra, at 481–83. It soon became apparent, however, that
the SEC lacked the capacity to regulate the over-the-counter market directly. Id. at 483–84; see
2
The idea of a joint stock company sprang in Tudor England “from the flint of the medieval craft
guilds, where merchants and manufacturers could pool their resources to undertake ventures
none could afford to make individually.” William Dalrymple, The Anarchy 7 (2019). The joint
stock company added passive investors, individuals who invested in a company “but were not
themselves involved in the running of it.” Id. The idea took hold in September 1599, when
English merchants met at Founders’ Hall in London to draw up a contract and include their
contributions in a subscription book to create the East India Company. Id. at 1–3. About a mile
away, William Shakespeare was drafting Hamlet, id. at 1—perhaps even the line “neither a
borrower nor a lender be.”
5
also SEC Concept Release Concerning Self-Regulation, Securities Exchange Act Release No.
50700, 69 Fed. Reg. 71,256, 71,257 & n.23 (Dec. 8, 2004).
In 1937, Congress considered how to address the unanticipated consequences of leaving
the SEC with full regulatory power in the industry. See Smythe, supra, at 483–85. Congress
worried that governmental regulation alone “would involve a pronounced expansion of the
organization of the [SEC]; the multiplication of branch offices; a large increase in the
expenditure of public funds; an increase in the problem of avoiding the evils of bureaucracy; and
a minute, detailed, and rigid regulation of business conduct by law.” Id. at 485 (quoting S. Rep.
No. 75-1455, at 3 (1938)). An SEC Commissioner confirmed that self-regulation fulfilled
Congress’s purpose and was needed due to “the immense burden” of effective rule enforcement.
Regulation of Over-the-Counter Markets: Hearing on S. 3255 Before the S. Comm. on Banking
and Currency, 75th Cong. 15–16 (1938). And so Senator Francis Maloney of Connecticut
introduced a bill to create a system of “cooperative regulation in which the task [of regulation
would] . . . be largely performed by representative organizations of investment bankers, dealers,
and brokers,” but “with the Government exercising appropriate supervision in the public interest,
and exercising supplementary powers of direct regulation.” Smythe, supra, at 484 (alteration
and omission in original) (quoting S. Rep. No. 75-1455, at 4).
Congress passed the Maloney Act in 1938 to keep self-regulation in the enforcement
picture by establishing the concept of registered national securities association SROs. Pub. L.
No. 75-719, 52 Stat. 1070 (1938) (codified as amended at 15 U.S.C. § 78o-3); see SEC Concept
Release Concerning Self-Regulation, 69 Fed. Reg. at 71,257. Congress again amended the
Exchange Act in 1975. SEC Concept Release Concerning Self-Regulation, 69 Fed. Reg. at
71,257–58. Rather than adopt a purely governmental approach, “Congress determined that it
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was distinctly preferable to rely on cooperative regulation, in which the task will be largely
performed by representative organizations of investment bankers, dealers, and brokers, with the
Government exercising appropriate supervision in the public interest, and exercising
supplementary powers of direct regulation.” Id. (cleaned up). Congress kept this regime in large
part because of the “sheer ineffectiveness of attempting to assure [regulation] directly through
the government on a wide scale.” Id. at 71,258 (alteration in original) (quoting S. Rep. No. 94-
75, at 22 (1975)). And yet again in 2004, the SEC explained that “[e]xperience appears to
indicate that the [SEC], in its current form, does not have the resources to effectively carry out
on its own the full panoply of duties for which the SROs are currently responsible.” Id. at
71,267; see also 15 U.S.C. § 78o-3(b)(2). 3
Together, the Exchange Act, the Maloney Act, and the 1975 amendments “reflect
Congress’[s] determination to rely on self-regulation as a fundamental component of U.S. market
and broker-dealer regulation, despite [an] inherent conflict of interest.” Id. at 71,256. Thus, for
over eight decades, federal law has maintained “a system of cooperative self-regulation through
voluntary associations of brokers and dealers” to supplement the SEC’s regulation of over-the-
counter markets. United States v. Nat’l Ass’n of Sec. Dealers, 422 U.S. 694, 700 n.6 (1975).
Under this statutory framework, SROs like FINRA supervise the securities industry but are also
subject to oversight from the SEC. See id.; 15 U.S.C. § 78s.
Subject to a narrow exemption, brokers and dealers transacting in the securities industry
must register with the SEC and join a national securities association. See 15 U.S.C. § 78o(a)(1),
3
The SEC has also noted that a shift to direct regulation “would require dramatic change” in
funding because the SEC would need to promulgate “detailed” rules and significantly expand its
surveillance and enforcement efforts. SEC Concept Release Concerning Self-Regulation, 69
Fed. Reg. at 71,281–82. FINRA and amici contend that the situation remains the same today.
See Dkt. 25 at 98:1–11; Dkt. 19 at 16; Dkt. 20 at 20–21.
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(b)(1). Today, FINRA is the only national securities association registered with the SEC.
Turbeville v. Fin. Indus. Regul. Auth., 874 F.3d 1268, 1270 n.2 (11th Cir. 2017); Press Release,
U.S. SEC, SEC Adopts Amendments to Exemption from National Securities Association
Membership (Aug. 23, 2023), https://www.sec.gov/news/press-release/2023-154.
2. FINRA’s Structure, Rulemaking Power, and Enforcement Proceedings
For a detailed review of FINRA’s structure, rulemaking power, and enforcement
proceedings, the Court commends to the reader the background section in Judge Howell’s
Scottsdale opinion. See 2023 WL 3864557, at *1–3. To avoid repetition, the Court lays out the
undisputed facts relevant here. Those facts demonstrate that FINRA (1) is privately organized;
(2) is privately funded; and (3) exercises discretion in its enforcement proceedings, which are
subject to de novo review by the SEC. Dkt. 25 at 9:6–11.
a. Private Organization
FINRA’s predecessors began as voluntary organizations. Dkt. 25 at 7:15–18. Although
the Exchange Act provides overarching guidance, it does not direct how FINRA must organize
itself or set its membership requirements. Id. at 8:20–25; see 15 U.S.C. § 78o-3(b). The SEC
may, however, limit FINRA’s operations or registration if FINRA violates a statute or SEC
regulation. See 15 U.S.C. § 78s(h)(1). The SEC also reviews and approves rules proposed by
FINRA. See id. § 78s(b)–(c).
FINRA sets professional rules of conduct for its roughly 3,400 brokerage firms, 150,000
branch offices, and 624,000 associated persons. Saad v. SEC, 873 F.3d 297, 299 (D.C. Cir.
2017); Dkt. 2-1 ¶ 62. Its board has twenty-two directors selected by FINRA’s members.
Scottsdale, 2023 WL 3864557, at *2; FINRA By-Laws, Composition and Qualifications of the
Board, art. VII, § 4; Dkt. 25 at 74:18–20; Dkt. 2-1 ¶¶ 111, 145–46. Neither the SEC nor any
8
other government entity can appoint FINRA’s directors or control its board. Dkt. 25 at 9:18–25.
A majority vote of FINRA’s board is needed to remove a director. See 15 U.S.C. § 78s(h)(4).
The SEC can do so in limited circumstances, such as a violation of law. See id.
b. Private Funding
FINRA is a not-for-profit corporation incorporated in Delaware. See Scottsdale, 2023
WL 3864557, at *2; Dkt. 2-1 ¶¶ 3, 25. It does not receive funding from the government. Dkt. 25
at 9:12–14. Instead, FINRA’s funding is derived almost exclusively through membership fees,
penalties, and sanctions. See, e.g., Scottsdale, 2023 WL 3864557, at *2; Dkt. 2-1 ¶ 65; see also
FINRA By-Laws, Power of the Corporation to Fix and Levy Assessments, art. VI, § 1.
c. Enforcement Discretion
Plaintiff concedes that FINRA has enforcement discretion. Dkt. 25 at 74:1–7. FINRA
decides whom to investigate, whom to bring charges against, what charges to bring, and what
sanctions to seek. See Dkt. 4-3 at 14, 28. 4 Other than serving as a level of review after a
hearing, the SEC plays no active role in FINRA’s enforcement proceedings. Dkt. 25 at 10:1–4,
71:17–72:3. FINRA can take enforcement actions against those who violate the securities laws
or FINRA’s own rules. Id. at 10:5–12, 28:17–20; see 15 U.S.C. § 78o-3(b)(7).
Disciplinary decisions are typically issued between nine and twenty-one months after
FINRA files a complaint. See Dkt. 11-2 ¶¶ 12, 17; see also Dkt. 25 at 37:13–17. 5 After a
4
The Exchange Act provides for the SEC to remove or censure FINRA officers and directors,
among other scenarios, if those individuals “without reasonable justification or excuse ha[ve]
failed to enforce compliance” with the securities laws. 15 U.S.C. § 78s(h)(4) (emphasis added).
Neither party contends that this impedes FINRA’s enforcement discretion.
5
In this case, the parties agree that the enforcement hearing will likely take place in “early to
mid-2024.” Dkt. 25 at 37:13–17.
9
hearing panel issues a written decision, see 15 U.S.C. § 78o-3(h)(1), and an aggrieved party
exhausts its internal appeals within FINRA, see Dkt. 2-1 ¶¶ 121–40, it may appeal to the SEC,
which conducts a de novo review, and, from there, to a federal appellate court, see 15 U.S.C.
§ 78y; Dkt. 25 at 16:5–8; see also 17 C.F.R. § 201.452 (permitting SEC to consider additional
evidence).
B. FINRA’s Enforcement Action Against Plaintiff
Plaintiff is a securities broker registered with FINRA, Dkt. 2-1 ¶¶ 19, 22, who was
previously associated with the FINRA member firm National Securities Corporation (NSC), Dkt.
11-5 ¶¶ 1, 4. FINRA began issuing requests for information and documents related to Plaintiff’s
activities in January 2020 and took Plaintiff’s testimony in August 2020. Dkt. 11-3 ¶ 6. 6 On
July 11, 2023, FINRA brought a disciplinary proceeding against Plaintiff. See Dkt. 11-5.
FINRA alleges that between December 2017 and June 2019, Plaintiff “engaged in unethical
conduct, acted in bad faith, and misused customer funds in connection with a private offering
sold by NSC.” Id. ¶ 1. Specifically, FINRA alleges that Plaintiff prompted a private offering in
“Company A” at a maximum price of $9.75 per share—in which 48 customers invested a total of
$4.055 million—even though he “had not confirmed a source of shares for the offering at any
price.” Id. FINRA further alleges that Plaintiff received a $16,220 commission and misled NSC
and investors “into believing that the fund had purchased Company A shares at the $9.75 price”
when “[i]nstead, investors owned Company A shares at a higher price and some of their funds
had not been used to purchase Company A shares at all.” Id. ¶¶ 2–3. Based on these allegations,
6
In December 2021, Plaintiff terminated settlement negotiations with FINRA, and, following a
call with FINRA’s staff, in early 2022, Plaintiff’s counsel declined to file a submission arguing
why FINRA should not bring a disciplinary action. See Dkt. 11-3 ¶¶ 7, 9. NSC reached a
settlement with FINRA in April 2022. Id. ¶ 8.
10
FINRA alleges that Plaintiff violated FINRA Rule 2010, which requires members to “observe
high standards of commercial honor and just and equitable principles of trade.” FINRA Rule
2010. 7
FINRA seeks a fine of $30,000 and disgorgement of about $16,000 in profits. Dkt. 25 at
92:10–22. It “does not [currently] intend to seek a bar against [Plaintiff’s participating in the
securities industry].” Dkt. 11-2 ¶ 22; see also Dkt. 11-3 ¶ 16. It reserves the right to seek
additional sanctions later if new information emerges. Dkt. 25 at 32:2–4. Ultimately, the
hearing panel imposes the sanction. Id. at 34:5–10, 35:10–13.
C. Plaintiff’s Claims and the District Court Proceedings
On August 18, 2023, Plaintiff brought this lawsuit. Dkts. 1, 2-1. 8 It asserts four causes
of action, alleging violations of (1) the separation of powers, including Article II’s Appointments
Clause and removal power, and the nondelegation doctrine; (2) Article III and the Fifth and
Seventh Amendments; (3) the First Amendment; and (4) the Sherman Act. See Dkt. 2-1 ¶¶ 199–
261.
On August 21, 2023—a day before his answer was due—Plaintiff filed the present
motion for a TRO and preliminary injunction to prohibit FINRA from proceeding with its
enforcement action against him. See Dkt. 4. After extensions by FINRA’s hearing officer,
Plaintiff’s answer is now due on October 6, 2023. Dkt. 25 at 95:25–96:3. On September 20,
2023, the United States intervened pursuant to Federal Rules of Civil Procedure 5.1 and 24(a)(1).
See Dkt. 14.
7
FINRA’s rules are available at https://www.finra.org/rules-guidance/rulebooks/finra-rules.
8
Plaintiff filed a corrected complaint on August 21, 2023. See Dkt. 2-1.
11
The Court held a multi-hour argument on Plaintiff’s motion on September 27, 2023. Dkt.
25. During this hearing, the Court requested supplemental briefing on whether it may deny
preliminary injunctive relief even if it finds or assumes a likelihood of success on a constitutional
claim. See Dkt. 25 at 41:6–42:20; Dkts. 22, 23, 26.
D. Proceedings in Scottsdale and Alpine
Although the facts differ, some of Plaintiff’s claims overlap with those in Alpine. See
Scottsdale, 2023 WL 3864557; Alpine, 2023 WL 4703307. Those include Plaintiff’s separation
of powers, Appointments Clause and removal power, private nondelegation, First Amendment,
Fifth Amendment, and Seventh Amendment claims. Scottsdale, 2023 WL 3864557, at *7. In
Scottsdale, Alpine moved for a TRO and preliminary injunction to stop FINRA’s enforcement
proceedings against it. Id. at *1. Judge Howell denied the request for preliminary injunctive
relief, holding that Alpine had “failed on all [four] factors.” Id. at *7.
Alpine appealed the denial of the preliminary injunction and sought an injunction
pending appeal, which a divided motions panel of the D.C. Circuit granted in a four-sentence per
curiam order on July 5, 2023. See Alpine, 2023 WL 4703307, at *1. The order stated that the
appellant, Alpine, “ha[d] satisfied the stringent requirements for an injunction pending appeal.”
Id. In a concurring statement, Judge Walker reasoned that FINRA’s structure is likely
unconstitutional because “Alpine ha[d] raised a serious argument that FINRA impermissibly
exercises significant executive power.” Id. at *2 (Walker, J., concurring). He also reasoned that
the other three preliminary injunction factors favor Alpine. Id. Judge Walker cautioned,
however, that he did “not rule out the possibility that further briefing and argument might
convince [him] that [his] current view [was] unfounded” and that “a vote to stay is not a decision
on the merits.” Id. (cleaned up). On August 22, 2023, the D.C. Circuit denied FINRA’s motion
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for en banc reconsideration of the motions panel’s decision. Merits briefing is scheduled to
finish by November 17, 2023. Oral argument has not yet been scheduled.
II. LEGAL STANDARD
Temporary restraining orders and preliminary injunctions are “extraordinary and drastic
remed[ies] . . . that should not be granted unless the movant, by a clear showing, carries the
burden of persuasion.” Mazurek v. Armstrong, 520 U.S. 968, 972 (1997) (per curiam) (cleaned
up); see also Cobell v. Norton, 391 F.3d 251, 258 (D.C. Cir. 2004). The same standard applies to
both forms of relief. Sterling Com. Credit—Mich., LLC v. Phoenix Indus. I, LLC, 762 F. Supp.
2d 8, 12 (D.D.C. 2011).
A plaintiff seeking preliminary injunctive relief must establish four factors: (1) “that he is
likely to succeed on the merits,” (2) “that he is likely to suffer irreparable harm in the absence of
preliminary relief,” (3) “that the balance of equities tips in his favor,” and (4) “that an injunction
is in the public interest.” Ramirez v. Collier, 142 S. Ct. 1264, 1275 (2022) (quoting Winter, 555
U.S. at 20). 9 “[T]he movant has the burden to show that all four factors, taken together, weigh in
favor of the injunction.” Abdullah v. Obama, 753 F.3d 193, 197 (D.C. Cir. 2014) (quoting Davis
9
The Court notes some “tension in the case law regarding the showing required on the merits for
a preliminary injunction”—whether the plaintiff must show a “likelihood of success” or a
“substantial likelihood of success” on the merits. Pursuing Am.’s Greatness v. FEC, 831 F.3d
500, 505 n.1 (D.C. Cir. 2016). The Supreme Court recently used “likely to succeed on the
merits” as the test, Ramirez, 142 S. Ct. at 1275, so the Court does as well. And because Plaintiff
cannot prevail under this standard, he also could not prevail under the more stringent “substantial
likelihood of success” standard.
13
v. Pension Benefit Guar. Corp., 571 F.3d 1288, 1292 (D.C. Cir. 2009)). 10 “Crafting a
preliminary injunction is an exercise of discretion and judgment, often dependent as much on the
equities of a given case as the substance of the legal issues it presents.” Trump v. Int’l Refugee
Assistance Project, 582 U.S. 571, 579 (2017) (per curiam). Further, “a party requesting a
preliminary injunction must generally show reasonable diligence.” Benisek, 138 S. Ct. at 1944.
III. ANALYSIS
A. Likelihood of Success on the Merits
None of Plaintiff’s claims are likely to succeed on the merits.
First, Plaintiff’s Article II claims are unlikely to succeed because FINRA is likely not a
state actor. Being a state actor requires permanent control by the government, Herron, 861 F.3d
at 168, but Plaintiff concedes, and the record reflects, that the government does not control
FINRA, see, e.g., Dkt. 25 at 9:5–14, 9:21–25, 71:17–19. And even if Plaintiff’s state action
theory applied to structural constitutional claims—which it does not—that theory, too, would
likely not succeed because it requires that FINRA share a close nexus with the government when
performing its enforcement work. FINRA does not.
Second, Plaintiff’s private nondelegation claim is unlikely to succeed. FINRA—not
subject to the government’s permanent control—functions subordinately to the SEC.
10
The D.C. Circuit has previously “applied a sliding scale approach under which a strong
showing on one factor could make up for a weaker showing on another.” Changji Esquel Textile
Co. v. Raimondo, 40 F.4th 716, 726 (D.C. Cir. 2022) (cleaned up). But the D.C. Circuit has
recently questioned “whether the sliding-scale approach remains valid” in light of “Supreme
Court decisions stating without qualification that a party seeking a preliminary injunction must
demonstrate, among other things, a likelihood of success on the merits.” Id. (cleaned up) (citing
Munaf v. Geren, 553 U.S. 674, 690 (2008); Winter, 555 U.S. at 20). The Court would deny
Plaintiff’s motion under either approach because he has not made a strong showing on any factor
and because of the particular importance of the balance of equities and public interest factors to
this case.
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Third, Plaintiff’s First Amendment claim, which the Court and the parties construe as a
challenge to the Exchange Act’s requirement to join FINRA, is unlikely to succeed because
Plaintiff has not shown how this requirement implicates his associational rights. Nor does
Plaintiff explain how FINRA uses its “arbitrary” fees in a way that is not “germane” to FINRA’s
mission. Keller v. State Bar of Cal., 496 U.S. 1, 14 (1990).
Fourth, Plaintiff conceded his Article III, Fifth Amendment, Seventh Amendment, and
Sherman Act claims because he did not address FINRA’s arguments that this Court lacks
jurisdiction over them.
1. Article II Appointments Clause and Removal Power Claims
Plaintiff is unlikely to succeed on his Article II claims because they require establishing
that FINRA is a state actor. And every court to have considered this state actor argument has
rejected it. See, e.g., Scottsdale, 2023 WL 3864557, at *8 n.7 (collecting cases); Nat’l
Horsemen’s Benevolent & Protective Ass’n v. Black, — F. Supp. 3d —, 2023 WL 3293298, at
*14 (N.D. Tex. May 4, 2023) (same), appeal docketed, No. 23-10520 (5th Cir.); Mohlman v. Fin.
Indus. Regul. Auth., Inc., No. 19-cv-154, 2020 WL 905269, at *6 (S.D. Ohio Feb. 25, 2020)
(same), aff’d, 977 F.3d 556 (6th Cir. 2020).
a. Whether FINRA, Though Nominally a Private Corporation, Is
Regarded as a State Actor
“[M]ost rights secured by the Constitution are protected only against infringement by
governments,” Lugar v. Edmondson Oil Co., 457 U.S. 922, 936 (1982) (quoting Flagg Brothers,
Inc. v. Brooks, 436 U.S. 149, 156 (1978)), so the question is whether FINRA, “though nominally
a private corporation, must be regarded as a Government entity” for constitutional purposes,
Lebron, 513 U.S. at 383. Likely not. The D.C. Circuit has emphasized that “[t]o find that a
government-created corporation is a government actor for constitutional purposes, Lebron
15
clearly requires permanent government control.” Herron, 861 F.3d at 168. This factor alone can
be dispositive. Id. And here, Plaintiff concedes that the government does not control FINRA’s
board, Dkt. 25 at 9:22–25, and that “FINRA’s enforcement activities” are “[n]ot directly”
“controlled by the government,” id. at 71:17–19. And with respect to the Court’s follow-up
question about any indirect control, Plaintiff conceded that “there is no day-to-day activity by the
SEC over FINRA.” Id. at 71:20–72:3. He is correct.
In Lebron, the Supreme Court held that Amtrak, though a private corporation, was a state
actor, or “part of the Government[,] for purposes of” individual constitutional rights because
(1) the “Government create[d] a corporation by special law,” (2) “for the furtherance of
governmental objectives,” and (3) “retain[ed] for itself permanent authority to appoint a majority
of the directors of that corporation.” 513 U.S. at 399; see Herron, 861 F.3d at 167 (explaining
that “Lebron sets forth a three-part standard to determine whether a government-created
corporation is part of the government for constitutional purposes”). The Court later applied
Lebron to hold that Amtrak is also a government entity for separation-of-powers and
nondelegation purposes. See Dep’t of Transp. v. Ass’n of Am. R.Rs., 575 U.S. 43, 55 (2015).
Lebron’s three-factor test shows that FINRA is likely not a state actor. First, Plaintiff
concedes that the government did not “create” FINRA “by special law” or any law. Lebron, 513
U.S. at 399. Private actors did. In 2007, the National Association of Securities Dealers and
NYSE Group, Inc., two SROs, transacted “to consolidate their member regulation operations into
a single [SRO] that would provide member firm regulation for securities firms that do business
with the public in the United States.” Order Approving Proposed Rule Change to Amend the
By-Laws of NASD, 72 Fed. Reg. 42,169, 42,170 (Aug. 1, 2007). And as explained above, this
practice of private self-regulation “dates to the 1790s, when private actors in the industry formed
16
securities exchanges that were voluntary in nature.” Dkt. 20 at 14. For good reason, then,
Plaintiff has conceded that the “federal government did not create FINRA.” Dkt. 25 at 9:15–17.
Second, to be sure, FINRA furthers governmental objectives. But that is not all of its
work. The organization also performs a variety of tasks outside the SEC’s mandate, such as
administering broker qualification exams and creating and enforcing professional standards for
brokers. See Turbeville, 874 F.3d at 1271; Dkt. 19 at 4–5.
Third, FINRA’s board is not “under the direction and control of federal governmental
appointees.” Herron, 861 F.3d at 167 (quoting Lebron, 513 U.S. at 398); see Dkt. 25 at 77:24–
78:2. FINRA is privately governed by a board of twenty-two directors selected by FINRA’s
members. Id. at 74:18–20; FINRA By-Laws, Composition and Qualifications of the Board, art.
VII, § 4; Dkt. 21 ¶¶ 111, 145–46; Scottsdale, 2023 WL 3864557, at *2. The government does
not have the “permanent authority to appoint” any directors, let alone “a majority” of them.
Lebron, 513 U.S. at 399. In Lebron on the other hand, the president appointed two-thirds (six of
nine) of Amtrak’s board members. Id. at 385. For added measure, unlike Amtrak, which “is . . .
dependent on federal financial support” and receives federal subsidies “exceed[ing] $1 billion
annually,” Ass’n of Am. R.Rs., 575 U.S. at 53, FINRA is “funded by member firm fees—without
the support of any taxpayer dollars,” FINRA, Financial Reports and Policies (last visited Oct. 4,
2023); 11 see Dkt. 25 at 9:10–14.
The Supreme Court’s discussion of SROs like FINRA in Free Enterprise Fund v. Public
Company Accounting Oversight Board, 561 U.S. 477 (2010), supports the conclusion that
FINRA is likely not a state actor. There, the Supreme Court compared the Public Company
Accounting Oversight Board’s (PCAOB) structure with that of SROs like FINRA. See id. at
11
This webpage is available at https://www.finra.org/about/annual-reports.
17
484. The Court highlighted that Congress created the PCAOB and that it has “five members,
appointed . . . by the [SEC].” Id. The parties agreed the PCAOB “is part of the Government for
constitutional purposes,” and the Court cited Lebron in support. Id. at 486 (cleaned up). The
Court contrasted this model with the structure of SROs. See id. at 484–85. “Unlike the self-
regulatory organizations,” including the New York Stock Exchange, “the [PCAOB] is a
Government-created, Government-appointed entity, with expansive powers to govern an entire
industry.” Id. at 485 (emphasis added).
* * *
Because FINRA is likely not a state actor, Plaintiff’s Article II challenges are unlikely to
succeed. Judge Walker’s concurring statement cites Lucia v. SEC, 138 S. Ct. 2044 (2018), as the
basis for Alpine’s Appointments Clause challenge and Free Enterprise Fund as the basis for its
removal power challenge. See Alpine, 2023 WL 4703307, at *3 (Walker, J., concurring).
Further briefing here has illuminated that neither case addressed the threshold question posed by
FINRA’s structure—whether FINRA hearing officers are employees of a federal government
entity or instrumentality in the first instance (i.e., whether the defendant is a state actor). Lucia
involved employees of the SEC, so “[t]he sole question” there was “whether the [SEC’s]
[administrative law judges] are ‘Officers of the United States’ or simply employees of the
Federal Government.” 138 S. Ct. at 2051. And, as noted above, in Free Enterprise Fund, “the
parties agree[d] that the [PCAOB] is part of the Government for constitutional purposes, and that
18
its members are ‘Officers of the United States.’” 561 U.S. at 486 (cleaned up). 12 The Court
therefore finds that “Lebron—rather than Lucia—supplies the appropriate standard, and [that
Plaintiff] fail[s] to prove” a likelihood of success on his “Article II appointments and removal
claims.” Nat’l Horsemen's Benevolent & Protective Ass’n, 2023 WL 3293298, at *15. In other
words, if individuals “are not officers of the United States, but instead are some other type of
officer, the Appointments Clause says nothing about them.” Fin. Oversight & Mgmt. Bd. for
P.R. v. Aurelius Inv., LLC, 140 S. Ct. 1649, 1658 (2020).
b. Whether FINRA Engages in State Action
The next question is whether, even if FINRA, a private company, is not a government
actor, FINRA’s enforcement work amounts to state action. See Lebron, 513 U.S. at 378. As
noted, see supra note 12, the state action theory does not apply to Plaintiff’s Article II
Appointments Clause or removal power claims. But because Plaintiff relies on the state action
12
In Free Enterprise Fund, the Court cited Lebron—a state actor case, see Lebron, 513 U.S. at
378—for the undisputed proposition that the PCAOB was “part of the Government,” such that its
members were subject to Article II’s Appointments Clause. Free Enter. Fund, 561 U.S. at 486.
Neither the Court nor the parties could find any case suggesting that Article II’s Appointments
Clause and removal requirements apply to a private entity that is not the government itself under
Lebron but merely engages in state action in certain circumstances, such as in Manhattan
Community Access Corporation v. Halleck, 139 S. Ct. 1921, 1926 (2019). See Dkt. 25 at 79:3–
80:1, 91:2–22. That is likely because such a conclusion would yield the “result that a private
entity would need to have a privately appointed and removable board and officers governing its
private conduct and a separate government-appointed and -removable board and officers
governing its state action.” Dkt. 11 at 22. In NB ex rel. Peacock v. D.C., 794 F.3d 31 (D.C. Cir.
2015), for example, the D.C. Circuit held that Xerox engaged in state action for purposes of the
Due Process Clause when it “effected the denial of prescription drug coverage” under Medicaid,
id. at 43. But that state action did not make Xerox subject to the Constitution’s Appointments
Clause or removal requirements. See Dkt. 11 at 21.
19
theory for his Article II claims, see Dkt. 16 at 6–14, the Court addresses it here as an additional
reason why these claims are unlikely to succeed. 13
The Supreme Court has stated “that actions of private entities can sometimes be regarded
as governmental action for constitutional purposes.” Lebron, 513 U.S. at 378. “[N]o one fact can
function as a necessary condition across the board for finding state action; nor is any set of
circumstances absolutely sufficient, for there may be some countervailing reason against
attributing activity to the government.” Brentwood Acad. v. Tenn. Secondary Sch. Athletic
Ass’n, 531 U.S. 288, 295–96 (2001). The inquiry is “necessarily fact-bound,” Lugar, 457 U.S. at
939, and the Supreme Court has “identified a host of facts that can bear on the fairness of such an
attribution” of state action, Brentwood, 531 U.S. at 296.
Under the Supreme Court’s state action precedents, “a private entity can qualify as a state
actor in a few limited circumstances—including, for example, (i) when the private entity
performs a traditional, exclusive public function; (ii) when the government compels the private
entity to take a particular action; or (iii) when the government acts jointly with the private
entity.” Halleck, 139 S. Ct. at 1928 (citations omitted); see also Brentwood, 531 U.S. at 296.
“[A]t bottom[,] the inquiry examines whether ‘there is such a close nexus between the State and
the challenged action that seemingly private behavior may be fairly treated as that of the State
itself.’” Budowich v. Pelosi, 610 F. Supp. 3d 1, 19 (D.D.C. 2022) (quoting Brentwood, 531 U.S.
at 295).
Plaintiff relies on the three Halleck theories of state action, see Dkt. 16 at 10–14, but the
Court finds that none are likely to succeed on the merits. First, FINRA does not “exercise[] a
13
FINRA argues that Plaintiff never pled a state action theory in his complaint and that the Court
need only address the Lebron state actor issue. See Dkt. 11 at 14–15. He arguably did plead this
theory, and so the Court addresses it for the sake of completeness.
20
function ‘traditionally exclusively reserved to the State.’” Halleck, 139 S. Ct. at 1926 (quoting
Jackson v. Metro. Edison Co., 419 U.S. 345, 352 (1974)). To the contrary, “[s]ecurities industry
self-regulation has a long tradition in the U.S. securities markets.” SEC Concept Release
Concerning Self-Regulation, 69 Fed. Reg. at 71,257; see supra Section I.A.1. Since 1938,
frontline authority over broker-dealers has fallen to private entities and not the state. See SEC
Concept Release Concerning Self-Regulation, 69 Fed. Reg. at 71,257.
Second, neither the SEC nor any other governmental agency “compels” FINRA “to take a
particular action.” Halleck, 139 S. Ct. at 1928. To the contrary, Plaintiff has conceded and
FINRA has supported the contentions that (1) the government does not control FINRA’s
enforcement proceedings, Dkt. 25 at 10:1–4, 68:2–16; Dkt. 11 at 24; (2) the government does not
control FINRA’s board, Dkt. 25 at 9:21–25; and (3) while FINRA does enforce securities laws,
its enforcement actions also concern violations of its own rules, id. at 10:5–11:1, 27:10–12.
Third, the government does not “act[] jointly with” FINRA in its enforcement actions,
Halleck, 139 S. Ct. at 1928, just because the SEC provides regulatory oversight. Plaintiff does
not explain his argument, and, in any event, the fact that the SEC and FINRA each play a role in
regulating securities trading does not mean that they act “jointly.” Cf., e.g., D.L. Cromwell Invs.,
Inc. v. NASD Regul., Inc., 279 F.3d 155, 161–62 (2d Cir. 2002) (rejecting argument that
FINRA’s predecessor engaged in state action based on its cooperation with federal officials).
FINRA “decides who[m] it will investigate, the tools it will deploy, and the scope of its
discovery demands,” and the SEC is not involved in FINRA’s enforcement process until the
appellate stage. Dkt. 2-1 ¶¶ 85, 87. This case exemplifies FINRA’s exercise of its enforcement
discretion. “At no point in time did the [SEC] ever direct, suggest, or encourage the
investigation” or “initiation of FINRA’s enforcement actions against . . . [Plaintiff].” Dkt. 11-3 ¶
21
3. For these reasons, courts in this District and elsewhere have repeatedly rejected arguments
that FINRA (or its predecessor entity, NASD) engages in state action. See, e.g., McGinn, Smith
& Co. v. Fin. Indus. Regul. Auth., 786 F. Supp. 2d 139, 147 (D.D.C. 2011); Marchiano v. Nat’l
Ass’n of Sec. Dealers, 134 F. Supp. 2d 90, 95 (D.D.C. 2001); Graman v. Nat’l Ass’n of Sec.
Dealers, Inc., No. 97-cv-1556, 1998 WL 294022, at *2–3 (D.D.C. Apr. 27, 1998); D.L.
Cromwell, 279 F.3d at 162.
2. Private Nondelegation Claim
Plaintiff’s private nondelegation claim is also unlikely to succeed on the merits.
Plaintiff’s complaint makes only cursory references to “non-delegation” or “unconstitutional
delegation” principles. Dkt. 2-1, ¶¶ 200, 209, 219–20. 14 The parties construe the claim as a
private nondelegation claim. See Dkt. 11 at 37–39; Dkt. 16 at 14–17. The Court does as well.
Congress may delegate authority to a private entity if the entity “function[s]
subordinately” to a government agency. Adkins, 310 U.S. at 399. In Adkins, for example, the
Supreme Court upheld a statutory scheme in which local boards consisting of private coal
producers would “propose minimum prices pursuant to prescribed statutory standards” that could
“be approved, disapproved, or modified” by a government agency. Id. at 388. The Court
reasoned that private industry members “function[ed] subordinately to the” government agency
and that the agency, not the private entities, “determine[d] the prices.” Id. at 399. The agency
also had “authority and surveillance over the activities of these” private entities, and “th[e]
statutory scheme [was] unquestionably valid” because “law-making [was] not entrusted to the
14
Debate swirls over whether the private nondelegation doctrine is rooted in the Fifth
Amendment’s Due Process Clause or the Constitution’s separation of powers established in the
three Vesting Clauses. See Oklahoma v. United States, 62 F.4th 221, 237–39 (6th Cir. 2023)
(Cole, J., concurring) (discussing Supreme Court and D.C. Circuit analysis of the distinction).
22
industry.” Id.; see also Ass’n of Am. R.Rs. v. U.S. Dep’t of Transp., 896 F.3d 539, 545 (D.C. Cir.
2018). As the D.C. Circuit has highlighted, “a number of arrangements by which regulatory
measures were imposed through the joint action of a self-interested group and a government
agency [have] passed constitutional muster.” Ass’n of Am. R.Rs., 896 F.3d at 545 (cleaned up).
Plaintiff’s private nondelegation challenge likely fails because FINRA “function[s]
subordinately” to the SEC, which has “authority and surveillance over [FINRA’s] activities.”
Adkins, 310 U.S. at 399. For example, the SEC retains authority to suspend or revoke FINRA’s
registration or “impose limitations upon [FINRA’s] activities, functions, and operations” as
“necessary or appropriate in the public interest, for the protection of investors, or otherwise in
furtherance of the purposes of [the Exchange Act].” 15 U.S.C. § 78s(h)(1). Although FINRA
promulgates its own rules and standards, subject to limited exceptions, the SEC must review and
approve any rules issued by FINRA. See id. § 78s(b)–(c). 15 And the SEC may “abrogate, add
to, and delete from” a FINRA rule at any time. Id. § 78s(c). Further, the SEC may review any
FINRA adjudication, following an internal appeals process, de novo and sua sponte. Id.
§ 78s(d)–(e); see Nat’l Ass’n of Sec. Dealers v. SEC, 431 F.3d 803, 806 (D.C. Cir. 2005). 16
FINRA’s subordinate regulatory structure to the SEC is why “[i]n case after case, the
courts have upheld this arrangement” against private nondelegation challenges. Oklahoma v.
United States, 62 F.4th 221, 229 (6th Cir. 2023). They “reason[] that the SEC’s ultimate control
15
“The Exchange Act permits three avenues for promulgation of a FINRA rule without the
SEC’s express approval.” Scottsdale, 2023 WL 3864557, at *2 n.2 (citing 15 U.S.C.
§ 78s(b)(3)(A)–(B); id. § 78s(b)(2)(D); id. § 78s(b)(3)(C)).
16
Plaintiff argues that although the Exchange Act “theoretically” allows the SEC to review
FINRA sanctions and disciplinary actions, the SEC rarely, if ever, does so and “has abandoned
its responsibility to actually supervise and control FINRA.” Dkt. 16 at 16–17. But Plaintiff has
not adequately developed the argument that how often and whether the SEC exercises its
supervisory authority can establish a private nondelegation claim. And even if he had, more
facts would be needed to assess this allegation.
23
over the rules and their enforcement makes the SROs” like FINRA “permissible aides and
advisors.” Id.; see Sorrell v. SEC, 679 F.2d 1323, 1325–26 (9th Cir. 1982); First Jersey Sec.,
Inc. v. Bergen, 605 F.2d 690, 697 (3d Cir. 1979); Todd & Co. v. SEC, 557 F.2d 1008, 1012–13
(3d Cir. 1977); R.H. Johnson & Co. v. SEC, 198 F.2d 690, 695 & n.10 (2d Cir. 1952); see also
Ass’n of Am. R.Rs. v. U.S. Dep’t of Transp., 721 F.3d 666, 671 n.5 (D.C. Cir. 2013) (citing these
cases because they “resemble Adkins insofar as they approve structures in which private industry
members serve in purely advisory or ministerial functions”), vacated and remanded on other
grounds, 575 U.S. 43 (2015). “The unanimous principle from the circuit decisions—which the
Supreme Court has not disturbed despite repeated opportunities to do so—is that so long as the
agency retains de novo review of a private entity’s enforcement proceedings, there is no
unconstitutional delegation of legislative or executive power, even if the agency does not review
the private entity’s initial decision to bring an enforcement action.” Oklahoma, 62 F.4th at 243
(Cole., J., concurring). As noted above, if an aggrieved party so requests, the SEC exercises de
novo review of FINRA’s enforcement proceedings following an internal appeals process. See 15
U.S.C. § 78s(d)–(e); Nat’l Ass’n of Sec. Dealers, 431 F.3d at 806.
The Court notes that it does not see a tension between holding both (1) that an entity is
not a state actor and (2) that the same entity does not run afoul of the private nondelegation
doctrine. Indeed, Plaintiff concedes that, in some circumstances, such an arrangement can be
constitutional. Dkt. 25 at 99:10–16. That is because the level of oversight required to satisfy the
nondelegation doctrine is different, both quantitatively and qualitatively, from the level of
permanent control required to make a nominally private corporation a state actor. FINRA’s
structure and work strikes the necessary balance.
24
For the reasons stated above, the Court finds that Plaintiff’s private nondelegation claim
is unlikely to succeed on the merits.
3. First Amendment Claim
Plaintiff’s First Amendment claim is also unlikely to succeed on the merits. Plaintiff
alleges that “[b]y forcing securities professionals to join, fund, and support an SRO, FINRA . . .
deprive[s] members and associated persons of their First Amendment rights.” Dkt. 2-1 ¶ 249.
The parties and the Court construe Plaintiff’s First Amendment claim as a challenge to the
Exchange Act’s statutory scheme, which means that to succeed, it does not require a finding that
FINRA is a state actor or engaged in state action.
The First Amendment protects “[t]he right to eschew association for expressive
purposes.” Janus v. Am. Fed’n of State, Cnty., & Mun. Emps., Council 31, 138 S. Ct. 2448, 2463
(2018). But this right is not absolute, and “[i]nfringements . . . may be justified by regulations
adopted to serve compelling state interests, unrelated to the suppression of ideas, that cannot be
achieved through means significantly less restrictive of associational freedoms.” Roberts v. U.S.
Jaycees, 468 U.S. 609, 623 (1984); see Boy Scouts of Am. v. Dale, 530 U.S. 640, 648 (2000).
Here, Plaintiff does not identify how his associational rights are implicated in any
intelligible way. See, e.g., Dkt. 16 at 19. None of Plaintiff’s allegations—including those that
securities professionals are unable to “self-govern their business” and must pay “higher and more
arbitrary fees” under FINRA membership, Dkt. 4-1 ¶¶ 238–50—illuminate any “expressive
purpose[]” that has caused him to want to “eschew association” with FINRA, Janus, 138 S. Ct. at
2463.
In any event, the Exchange Act provides several compelling interests to justify
regulation. SROs like FINRA work “to prevent fraudulent and manipulative acts and practices,
25
to promote just and equitable principles of trade, to foster cooperation and coordination . . . , to
remove impediments to and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public interest.” 15 U.S.C. § 78o-
3(b)(6).
In Keller, the Supreme Court rejected a similar First Amendment challenge to a
mandatory state bar, holding that “lawyers admitted to practice in the State may be required to
join and pay dues to the State Bar,” so long as “the compelled association . . . [is] justified by the
State’s interest in regulating the legal profession and improving the quality of legal services.”
496 U.S. at 4, 13. A state bar “may therefore constitutionally fund activities germane to those
goals out of the mandatory dues of all members.” Id. at 14. FINRA’s activities are not
materially different.
Despite Plaintiff’s allegation of “higher and more arbitrary fees,” Dkt. 2-1 ¶ 244, he does
not explain how those fees are used in a way that is not “germane” to FINRA’s mission or how
they “fund activities of an ideological nature which fall outside of those areas of” FINRA’s
compelling interest in regulation. Keller, 496 U.S. at 13–14. Plaintiff’s First Amendment claim
is unlikely to succeed on the merits.
4. Article III, Fifth Amendment, Seventh Amendment, and Sherman Act
Claims
Plaintiff’s remaining claims—which allege violations of Article III, the Fifth
Amendment, the Seventh Amendment, and the Sherman Act—are unlikely to succeed on the
merits for a simple reason. Plaintiff did not respond to FINRA’s argument that this Court lacks
jurisdiction under Axon Enterprise Inc. v. FTC, 598 U.S. 175 (2023), thus conceding the issue.
FINRA argues that the Court lacks subject matter jurisdiction over these claims because
they are subject to the Exchange Act’s exclusive review provisions, which provide that a person
26
aggrieved by a final order from the SEC may obtain review in a court of appeals. See 15 U.S.C.
§ 78y(a)(1); Axon, 598 U.S. at 185; Dkt. 11 at 26–31, 41. Axon’s exception to the requirement
that individuals must exhaust their administrative remedies before seeking judicial review
provides district courts with jurisdiction over “far-reaching constitutional claims,” 598 U.S. at
185, or “claims that the structure, or even existence, of an agency violates the Constitution” if
they are “collateral to any decisions the [SEC] could make in individual enforcement
proceedings” and “fall outside the [SEC’s] sphere of expertise,” id. 195–96. Plaintiff offers no
response to FINRA’s jurisdictional argument. 17 See Dkt. 16 at 18–19. “If a party fails to counter
an argument that the opposing party makes in a motion, the court may treat that argument as
conceded.” Day v. D.C. Dep’t of Consumer & Regul. Affs., 191 F. Supp. 2d 154, 159 (D.D.C.
2002). And “[t]he merits on which plaintiff must show a likelihood of success encompass not
only substantive theories but also establishment of jurisdiction.” Elec. Priv. Info. Ctr. v. U.S.
Dep’t of Com., 928 F.3d 95, 104 (D.C. Cir. 2019) (cleaned up).
Therefore, the Court need not address whether Axon provides jurisdiction over Plaintiff’s
Article III, Fifth Amendment, Seventh Amendment, and Sherman Act claims. Instead, it holds
that Plaintiff has failed to make any showing, let alone “a clear showing,” Mazurek, 520 U.S. at
972 (cleaned up), that this Court has jurisdiction over these claims and that they are likely to
succeed, see Church v. Biden, 573 F. Supp. 3d 118, 133 (D.D.C. 2021). 18
17
Plaintiff’s conclusory allegation that he “presents claims that are beyond FINRA’s and the
SEC’s expertise, collateral to any administrative proceeding against [him], and properly heard by
this District Court,” Dkt. 2-1 ¶ 36, does not resolve the jurisdictional issue.
18
FINRA contends this Court has jurisdiction over Plaintiff’s Article II Appointments Clause
and removal requirement, First Amendment, and private nondelegation claims. See Dkt. 11 at
28. The Court agrees that it has jurisdiction over these claims because they are “far-reaching
constitutional claims” about the structure of FINRA and the Exchange Act’s statutory scheme—
not issues FINRA or the SEC “customarily handle[]” or “can apply distinctive knowledge to.”
Axon, 598 U.S. at 185–86.
27
B. Irreparable Harm
Plaintiff cannot establish that he is likely to face irreparable harm absent preliminary
injunctive relief. He argues that he faces irreparable harm because “his BrokerCheck already
tells the whole world that FINRA has accused him of securities fraud, and he will lose his chosen
profession on FINRA’s whim.” Dkt. 4-3 at 31 (citing Alpine, 2023 WL 4703307, at *2 (Walker,
J., concurring)). And he argues that “being forced into an unconstitutional forum is a ‘here-and-
now injury’ that cannot be reversed or remedied after the fact.” Id. (quoting Axon, 598 U.S. at
191). FINRA counters that Plaintiff’s constitutional harm argument would fail if the Court
rejected his likelihood of success on those claims and that in any event, his “claim of urgency
and imminent irreparable harm . . . is significantly overstated.” Dkt. 11 at 42. The Court agrees
with FINRA. Because Plaintiff’s claims are unlikely to succeed on the merits, his constitutional
arguments do not give rise to irreparable harm. See Archdiocese of Wash. v. Wash. Metro. Area
Transit Auth., 897 F.3d 314, 334 (D.C. Cir. 2018). 19
Further, Plaintiff does not face the same degree and immediacy of harm as Alpine.
Alpine involved an expedited enforcement proceeding and the company’s attempt to block its
“expulsion from FINRA—the so-called ‘corporate death penalty.’” Alpine, 2023 WL 4703307,
at *1 (Walker, J., concurring). FINRA was taking “expedited steps to expel the company from
the industry” in light of Alpine’s “chronic recidivism.” Scottsdale, 2023 WL 3864557, at *12.
When the district court ruled on Alpine’s motion for a preliminary injunction, FINRA’s
enforcement proceeding was set to potentially conclude soon, id., which could have “stop[ped]
Alpine from selling securities,” Alpine, 2023 WL 4703307, at *1.
19
Axon’s holding addressed whether district courts have jurisdiction over constitutional claims,
not whether those claims give rise to an irreparable injury for purposes of the preliminary
injunction analysis. See 598 U.S. at 195–96; see also Leachco, Inc. v. Consumer Prod. Safety
Comm’n, No. 22-cv-232, 2023 WL 4934989, at *2 (E.D. Okla. Aug. 2, 2023).
28
Not here. This case instead is in the early days. Plaintiff has not yet filed his answer,
which can be bare-bones. See Dkt. 22-1 (sample FINRA answer). Before the hearing, Plaintiff
will participate in a pre-hearing scheduling conference and may be asked to submit documents in
addition to his original production. Dkt. 25 at 36:24–37:22; Dkt. 11-3 ¶ 20. The enforcement
hearing will likely take place in “early to mid-2024.” Dkt. 25 at 37:13–17; see also Dkt. 11-3
¶ 20. After the hearing, there could be additional briefing. Dkt. 25 at 38:5–7. And then, if the
hearing panel rules against Plaintiff, the sanction imposed could be stayed pending Plaintiff’s
appeal in FINRA’s internal process. See id. at 40:3–10.
If the hearing panel finds that Plaintiff violated FINRA Rule 2010, he will most likely
face only a fine. See Dkt. 11-5 at 15 (requesting monetary sanctions as a form of relief). At the
Court’s hearing, FINRA explained that its “enforcement staff is planning to request a fine of
$30,000” and disgorgement of about $16,000 in profits. Dkt. 25 at 92:10–11, 92:20–22. And
FINRA filed declarations confirming that it does not currently seek expulsion and will not seek it
“absent intervening misconduct or unforeseen circumstances.” Dkt. 11-2 ¶ 22; Dkt. 25 at 31:4–
5. Notably, FINRA did not expel Plaintiff’s firm, National Securities, for its participation in
similar charged conduct. See Dkt. 11-3 ¶ 8.
In sum, the circumstances here differ materially from FINRA’s “expedited” enforcement
action against Alpine that sought “immediate expulsion.” Scottsdale, 2023 WL 3864557, at *1.
The requirements that Plaintiff file a bare-bones answer, participate in a pre-hearing conference,
and potentially produce additional documents could, of course, constitute some harm. But the
Court does not find that degree of harm sufficient to justify preliminary injunctive relief.
29
C. Balance of Equities and Public Interest
Citing Alpine and Axon, Plaintiff argues that the equities and public interest prohibit him
from being subjected to an unconstitutional or unlawful enforcement proceeding. Dkt. 4-3 at 32.
FINRA disagrees because of its statutory mandate to enforce compliance with its own rules,
including FINRA Rule 2010, and the public interest in “trust and honesty in the securities
market.” Dkt. 11 at 44. FINRA also argues that granting injunctive relief here would create a
ripple effect in which “every respondent in a FINRA disciplinary proceeding, as well as every
disciplinary proceeding commenced by other SROs, . . . need only file a copy-cat suit in federal
court to obtain a judicially-imposed stay of the proceeding.” Id. at 44–45. The Court finds that
both the equities and public interest weigh against granting Plaintiff preliminary injunctive
relief. 20
1. Balance of Equities
The Court finds that the equities favor FINRA. Enjoining this enforcement proceeding
would interfere with FINRA’s regulatory mission and ability to enforce its own rules. See Dkt.
22 at 2. There are currently 19 active complaints before FINRA hearing officers, and 1,452
active investigations. Dkt. 25 at 95:9–14. FINRA is aware of at least one other respondent who
“moved for a stay of his FINRA disciplinary proceeding based on the constitutional arguments
that are at issue here,” and, following the hearing officer’s denial of the stay, “communicated . . .
that he intends to initiate litigation and seek a preliminary injunction.” Id. at 48:15–22. 21 More
20
Because FINRA, not the government, is the opposing party, the Court separates the balance of
equities and public interest into two factors, see Nken v. Holder, 556 U.S. 418, 435 (2009), but
notes that they overlap in many ways.
21
FINRA confirmed by email to the Court and the other parties that this update was current as of
October 4, 2023.
30
copy-cat suits would inevitably follow if this Court read the Alpine order to suggest that each
challenged FINRA enforcement action must be stayed pending the Alpine merits decision instead
of conducting a case-specific analysis. Plaintiff’s counsel himself “was hesitant to . . .
affirmatively bring” these types of lawsuits prior to the Alpine order and Judge Walker’s
concurring statement. Tr. of Aug. 23, 2023 Status Conference at 10:18–21.
On the other hand, as discussed above, Plaintiff does not face imminent enforcement
action or the “corporate death penalty.” 22 Nor has Plaintiff acted with alacrity. Cf. Benisek, 138
S. Ct. at 1944 (discussing significance of delay). Plaintiff has been on notice of the investigation
since at least 2020. See Dkt. 11-3 ¶ 6. And in early 2022, Plaintiff’s counsel declined to file a
submission arguing why FINRA should not bring a disciplinary action. Id. ¶¶ 7, 9. Having
given up that chance to avoid a hearing altogether, Plaintiff then waited thirty-eight days after
FINRA filed its complaint to bring this lawsuit and even longer to request preliminary injunctive
relief. Dkt. id. ¶ 10; Dkts. 1, 4. These facts, when balanced against the harm to FINRA in this
case—and the potential impact on its other cases—counsel against granting preliminary
injunctive relief.
2. Public Interest
The Court recognizes that the protection of constitutional rights serves the public interest.
But the Court does not find that Plaintiff’s constitutional claims are likely to succeed. And even
22
The filing of an answer and participation in the pre-hearing conference will alter the status
quo, which is defined as “the last uncontested status which preceded the pending controversy.”
Huisha-Huisha v. Mayorkas, 27 F.4th 718, 733 (D.C. Cir. 2022) (cleaned up) (emphasis
omitted). But given that Plaintiff has already produced documents and given sworn testimony,
see Dkt. 11-3 ¶ 6, the Court does not find that those additional steps significantly alter the status
quo. Requiring FINRA to stay its enforcement proceeding would also impact the status quo,
arguably even more so than permitting the proceeding to continue.
31
if they were, under the circumstances in this case, countervailing public interest considerations
favor FINRA.
FINRA’s ability to effectively enforce its rules and protect the integrity of U.S. securities
markets promotes the public interest. See, e.g., Taseko Mines Ltd. v. Raging River Cap., 185 F.
Supp. 3d 87, 94 (D.D.C. 2016). FINRA’s membership includes roughly 3,400 brokerage firms,
150,000 branch offices, and 624,000 associated persons. Dkt. 2-1 ¶ 62. FINRA and other SROs
provide essential first-line level protection in real time, which the SEC lacks the means and
resources to replicate. E.g., Dkt. 20 at 21. As amici the Securities Exchanges explain, for
example, “the Exchanges can quickly institute trading halts upon the leakage of material news to
prevent some market participants from acting upon information that others lack.” Dkt. 20 at 21.
SROs like FINRA exercise “soft law” authority; “[t]he theory justifying self-regulation is that it
is more flexible than government regulation and is based on a superior knowledge of industry
practices and capabilities.” Roberta S. Karmel & Claire R. Kelly, The Hardening of Soft Law in
Securities Regulation, 34 Brook. J. Int’l L. 883, 890 (2009); see also Dkt. 19 at 16–17 (discussing
the public benefits of self-regulation). On the other hand, as history shows, serious problems
unfold when the SEC is left with sole oversight responsibility, see supra Section I.A.1 and note
3, which is what amici predict would happen again, see Dkt. 19 at 16; Dkt. 20 at 20–21.
Suspending FINRA’s ability to enforce its own rules would harm investors. As the D.C.
Circuit has explained about the FINRA rule at issue in this case, “[t]he high ethical standards
enforced by Rule 2010 are vital because customers and firms must be able to trust securities
professionals with their money. Trustworthiness and integrity thus are essential to the
functioning of the securities industry.” Saad, 873 F.3d at 299 (cleaned up). Suspending
FINRA’s enforcement ability would likely interfere with the “efficiency, reliability, and safety”
32
of U.S. capital markets. Dkt. 20 at 21; see also Scottsdale, 2023 WL 3864557, at *9 n.8
(discussing potential risks of liquidity and credit problems to stability of U.S. markets).
Investors could be harmed by FINRA’s even temporary inability to self-regulate securities
markets. See Dkt. 11 at 45.
Further, Plaintiff’s arguments, if accepted, could apply to enjoin other SROs in the
financial industry and elsewhere, which would further upend a long-standing system. See, e.g.,
Dkt. 19 at 10–18 (arguing that granting Plaintiff preliminary injunctive relief could be used to
challenge other SROs). At least one other litigant with a pending case has raised a similar
constitutional challenge to an SRO—National Horsemen’s Benevolent & Protective Ass’n v.
Black, No. 23-10520 (5th Cir.), cited and discussed above, see supra Section III.A.1, involves an
Appointments Clause challenge to the Horseracing Integrity and Safety Authority. See Dkt. 22
at 5 n.4.
* * *
Even if the Court were to assume that Plaintiff has established a likelihood of success on
the merits and irreparable harm, the Court would still deny Plaintiff’s motion because both the
balance of equities and the public interest strongly disfavor the requested relief and would
outweigh even a successful showing on the other two factors.
The Supreme Court has emphasized that preliminary injunctive relief is “never awarded
as of right,” and, “[a]s a matter of equitable discretion,” it “does not follow as a matter of course
from a plaintiff’s showing of a likelihood of success on the merits.” Benisek, 138 S. Ct. at 1943–
44 (cleaned up). Similarly, a court need not issue such relief “even though irreparable injury
may otherwise result to the plaintiff.” Weinberger v. Romero-Barcelo, 456 U.S. 305, 312 (1982)
(cleaned up). In Winter, for example, the Court held that “proper consideration” of the balance
33
of equities and public interest “factors alone [would have] require[d] denial of the requested
injunctive relief,” “even if [the] plaintiffs [had] shown irreparable injury” and a likelihood of
success on the merits. 555 U.S. at 23–24; accord Chaplaincy of Full Gospel Churches v.
England, 454 F.3d 290, 304 (D.C. Cir. 2006).
Importantly, this body of case law shows that a court can deny preliminary injunctive
relief solely on the balance of equities and public interest factors even in cases, like this,
involving constitutional claims. In Benisek, the Supreme Court affirmed the district court’s
denial of a preliminary injunction against the use of a purportedly gerrymandered electoral map
that, the plaintiffs alleged, violated the First Amendment. 138 S. Ct. at 1943–44; 23 see Benisek v.
Lamone, 266 F. Supp. 3d 799, 801 (D. Md. 2017) (three-judge panel), aff’d, 138 S. Ct. 1942.
The Court held that even if it “assume[d] . . . that [the] plaintiffs were likely to succeed on the
merits of their claims, the balance of equities and the public interest tilted against their request
for a preliminary injunction.” 24 Benisek, 138 S. Ct. at 1944. The Court held that “the public
interest in orderly elections” and the fact that a pending appeal in another case “had the potential
to shed light on critical questions in th[e] case” supported the district court’s denial of interim
relief. Id. at 1944–45 (cleaned up). Similarly, in this case, the public interest in “orderly”
23
Benisek was a per curiam opinion. See 138 S. Ct. at 1943. But no party argues that that fact
makes Benisek irrelevant. Decisions of the U.S. Supreme Court are binding on the lower
courts. See, e.g., United States v. Hillie, 39 F.4th 674, 683 (D.C. Cir. 2022). Consistent with
that fact, lower courts around the country have relied upon Benisek. See, e.g., Eggers v. Evnen,
48 F.4th 561, 567 (5th Cir. 2022); D.T. v. Sumner Cnty. Schs., 942 F.3d 324, 326–28 (6th Cir.
2019).
24
The Court did not specifically discuss whether it also assumed the plaintiffs had established
irreparable harm. See Benisek, 138 S. Ct. at 1943–44. But since the case involved a First
Amendment claim, and “[t]he loss of First Amendment freedoms, for even minimal periods of
time, unquestionably constitutes irreparable injury,” Elrod v. Burns, 427 U.S. 347, 373 (1976)
(plurality opinion), its assumption that the plaintiffs had established a likelihood of success
implied a corresponding assumption that the plaintiffs had shown irreparable harm.
34
regulation of the securities sector, see Taseko Mines, 185 F. Supp. 3d at 94, and the fact that the
pending Alpine appeal will likely soon resolve the merits issues here point toward a strong public
interest in denying Plaintiff’s motion. Benisek supports the Court’s determination that, “[a]s a
matter of equitable discretion,” a preliminary injunction is unwarranted. 138 S. Ct. at 1943. 25
Multiple recent decisions of this District support such an outcome. In Allina Health
Services v. Sebelius, 756 F. Supp. 2d 61 (D.D.C. 2010), for example, decided under the more
plaintiff-friendly sliding scale test, the court held that “[e]ven assuming the [plaintiffs] ha[d]
demonstrated a likelihood of success on the merits,” and despite the plaintiffs’ having at least
arguably shown irreparable injury, it would “nonetheless deny [their] motion for a preliminary
injunction . . . in light of the imminence of a controlling decision from the D.C. Circuit and the
public interest,” id. at 67; see id. at 67–69, 71 (discussing irreparable injury); see also, e.g.,
C.G.B. v. Wolf, 464 F. Supp. 3d 174, 215–23 (D.D.C. 2020) (denying preliminary injunction
based on balance of equities and public interest despite showing of irreparable harm and
likelihood of success on constitutional claim). The court reasoned that the balance of equities cut
against the plaintiffs’ requested injunction, which would have prevented the Secretary of Health
and Human Services from implementing a revised formula for certain Medicare payments, see
id. at 63–65, and thereby imposed costs on both the Secretary and other Medicare participants,
see id. at 69. That same consideration, as well as the facts that the proposed relief would have
25
D.C. Circuit case law is consistent with this approach. For example, the Circuit explained in
League of Women Voters of the United States v. Newby, 838 F.3d 1 (D.C. Cir. 2016), that
“likelihood of success on the merits is a strong indicator that a preliminary injunction would
serve the public interest,” id. at 12. But the court did not hold that likelihood of success is
dispositive, and it instead engaged in a long, fact-specific analysis of the equities in that case.
See id. at 12–14. And although the D.C. Circuit stated in Archdiocese of Washington that “were
[the plaintiff] to show a likelihood of success on the merits, it would prevail on the final three
factors,” 897 F.3d at 334 (citation omitted), the court did not categorically state that this was true
in every case and again analyzed case-specific facts, id. at 335.
35
created severe disruptions in administering Medicare payments and that the D.C. Circuit would
soon issue a “controlling decision on the [relevant] legal issue,” meant that the public interest
also disfavored an injunction. Id. at 69–71.
Plaintiff here seeks a similarly disruptive remedy, one that would threaten to deregulate a
large swathe of the securities sector. Such relief would impose costs on the public at large
through a heightened risk of securities fraud, and the D.C. Circuit’s Alpine decision will likely
clarify whether Plaintiff’s constitutional claims have merit in the near term. As in Allina Health
Services, the balance of equities and public interest thus would outweigh even a successful
showing on the other preliminary injunction factors and render preliminary relief inappropriate.
The Court would therefore deny Plaintiff’s motion even if it concluded that Plaintiff had shown a
likelihood of success on the merits and irreparable harm.
IV. CONCLUSION
Plaintiff’s Motion for a TRO and Preliminary Injunction, Dkt. 4, is denied. An order
consistent with this memorandum opinion has been entered.
____________________________
Date: October 6, 2023 ANA C. REYES
United States District Judge
36