Eight days ago, Scottsdale Capital Advisors and Alpine Securities Corp. filed a Complaint in the Middle District of Florida arguing that FINRA’s structure and operation violate the U.S. Constitution.  The firms argue that FINRA is unconstitutional under the Appointments Clause, separation of powers principles, and the nondelegation doctrine.  The case has attracted some coverage already.

The suit makes many of the arguments I previewed in Supreme Risk, which was recently published by the Florida Law Review.  When I foresaw this risk, I highlighted four doctrinal areas where the Supreme Court might invalidate or significantly limit SROs, including: (i) nondelegation doctrine; (ii) separation of powers doctrine; (iii) state action; and (iv) appointments clause issues.

While it’s still very early, this type of challenge now presents a colorable risk to self-regulatory organizations.  If these arguments succeed against FINRA, it’s likely to cause significant market disruption.  It also lowers the barrier to press the same arguments against any SRO with a similar structure.

I would expect a case like this to make its way through the courts and toward the Supreme Court eventually.  It would not surprise me if groups like the Pacific Legal Foundation seek to get involved as well.  As FINRA has not yet filed its answer, it’ll be interesting to watch this matter develop.