FINRA Outside the Law?

Birkelbach v. SEC| 13-2896

July 2014

Birkelbach v. SEC suggests that if the government sufficiently delegates enough of its authority to the right people, it just might be able to operate outside of the law.

Birkelbach was president of a securities investment company and was found to have failed to supervise a subordinate who engaged in churning. A hearing panel of the Financial Industry Regulatory Authority, Inc. (FINRA) suspended him for six months and fined him $25,000. He then appealed to FINRA’s National Adjudicatory Council (NAC) who affirmed the panel’s findings, but increased his sanction to a lifetime ban. Birkelbach then appealed to the Securities and Exchange Commission (SEC), which affirmed NAC’s increased sanction.

On appeal to the Seventh Circuit, Birkelbach argued that the complaint brought against him by FINRA was untimely because it came more than five years after his conduct began. He also challenged his lifetime ban.

The Seventh Circuit affirmed – reversal being allowed only if the SEC order “is unwarranted in law or without justification in fact.” But in doing so, it made two comments that practitioners should note:

(1) The Court left open the question of whether FINRA is a “government agency” bound by the five-year statute of limitations in 28 USC §2462. FINRA is a “not-for-profit self-regulatory organization” empowered to ensure compliance with federal securities laws. It was established because the SEC “lacks the resources to police the entire [securities] industry.” Nevertheless, the SEC denied Birkelbach’s statute of limitations defense, in part, because it held that FINRA was a private entity and not a “government agency.” The Seventh Circuit, in affirming the sanctions against Birkelbach, left that questions open holding that his conduct extended into the five-year limitations period and therefore it “need not address §2462’s applicability.”

(2) The Court held that NAC was well within its power to increase – from six months to life – a sanction imposed by a FINRA hearing panel, and that its decision to do so did not punish Birkelbach for exercising his right to appeal.

That FINRA may be able to do what the SEC cannot, and NAC may be able to do what an appellate court may not, are warnings certainly worth remembering.