The D.C. Circuit issued its opinion in the Alpine case this morning. I’ve covered this case repeatedly and have links to much of the briefing. The majority opinion summarized the state of play and its holding this way:

In 2022, FINRA sanctioned one of its members, Alpine Securities Corporation, for violating FINRA’s private rules for member behavior and imposed a cease-and-desist order against Alpine. Alpine then sued in federal court, challenging FINRA’s constitutionality.

While that lawsuit was pending, FINRA concluded that Alpine had violated the cease-and-desist order and initiated an expedited proceeding to expel Alpine from membership in FINRA. Alpine then sought a preliminary injunction from the district court against the expedited proceeding, arguing that FINRA is unconstitutional because its expedited action against Alpine violates either the private nondelegation doctrine or the Appointments Clause. The district court denied the preliminary injunction.

We now reverse only to the extent the district court allowed FINRA to expel Alpine with no opportunity for SEC review. Alpine is entitled to that limited preliminary injunction because it has demonstrated that it faces irreparable harm if expelled from FINRA and the entire securities industry before the SEC reviews the merits of FINRA’s decision. Alpine has also demonstrated a likelihood of success on its argument that the lack of governmental review prior to expulsion violates the private nondelegation doctrine. We accordingly hold that FINRA may not expel Alpine either before Alpine has obtained full review by the SEC of the merits of any expulsion decision or before the period for Alpine to seek such review has elapsed. (emphasis added)

The decision grants Alpine a reprieve for the SEC to consider the merits of FINRA’s decision to expel Alpine. This is the crux of the private non-delegation analysis:

The result of this regulatory scheme is that FINRA can, without any SEC review of its decision on the merits, effectively decide who can trade securities under federal law. Due to FINRA’s current expedited-hearing process, the SEC statutorily cannot review expulsion orders before they go into effect and may be unable or unwilling to grant a stay so that it can meaningfully review a decision before it goes into effect and the expelled member’s business collapses.

So if the SEC reviews FINRA’s expulsion orders at all, it does so only through a stay proceeding that disfavors immediate relief for the expelled member and does not decide the merits. That falls short of what the private nondelegation doctrine requires:  an accountable government actor that “retains the discretion to approve, disapprove, or modify” FINRA’s delegated decisions.  AmtrakI, 721 F.3d at 671 (formatting modified); see Adkins, 310 U.S. at 388.

The majority opinion avoids many of the concerns I worried about when I wrote Supreme Risk. It expressly stresses that “our opinion is narrow and limited to expedited expulsion proceedings, where the irreversible nature of the underlying sanction prevents review on the merits by the SEC.” The opinion goes on to again explicitly stress the narrow nature of its ruling for four different reasons: (1) the opinion is in the context of a limited preliminary injunction record; (2) the opinion is “limited to expulsion orders issued in expedited proceedings; (3) the opinion does not address “FINRA’s own ability to delay the effectiveness of its expulsion orders in expedited proceedings, or the SEC’s authority to lower its stay standard in expulsion cases;” and (4) “nothing  in  our  opinion  questions  the constitutionality of enforcing an expulsion order, or any other sanction, after the SEC has affirmed it.”

The majority pushed Appointments Clause issues to the side, deciding that Alpine was not entitled to a preliminary injunction on those issues–particularly because the SEC must now conduct a review of Alpine’s expulsion. There is no argument that the SEC isn’t validly appointed under the Appointments Clause.

Alpine also argued that it should not be forced to litigate before FINRA’s allegedly unconstitutionally appointed officers. The majority saw that argument as foreclosed by existing precedent–citing three diffferent cases. From them, the majority concluded that, collectively, “those three cases squarely hold that being investigated by, or participating in a proceeding before, an unconstitutionally appointed officer is not, without more, an injury that necessitates preliminary injunctive relief.”

On the whole, I’d call this a qualified win for FINRA. This certainly isn’t over though as the opinion explains that “nothing in this opinion resolves Alpine’s claims on the merits.”

Judge Walker filed a dissent. If he had secured another vote, he would have prohibited FINRA from bringing enforcement proceedings. His dissent argues that:

FINRA wields significant executive authority when it investigates, prosecutes, and initially adjudicates allegations against a company required by law to put itself at FINRA’s mercy. That type of executive power can be exercised only by the President (accountable  to  the  nation)  and  his  executive  officers (accountable to him).

By  flouting  that  principle  through  an  “illegitimate proceeding, led by an illegitimate decisionmaker,” FINRA imposes an irreparable injury that this court should prevent by granting the requested preliminary injunction in its entirety.

What will happen next? We’ll have to see what the parties decide to do. Alpine might take a shot at en banc review or appeal to the Supreme Court. From an ongoing enforcement perspective, the decision undercuts the ability of SROs to swiftly expel scoundrels from the industry.

Consider how the reasoning here might apply to the National Future Association. Can they move quickly to expel bad actors or must they wait for the CFTC to approve their action?

In Supreme Risk, I highlighted how the NFA was able to expel Jacob Wohl in about six months after problems emerged. If the CFTC needs to be involved, expulsions like this may take longer.

The ability to move quickly is one of the key benefits for SROs. The decision makes SRO enforcement a bit less efficient and likely increases the amount of time bad actors may be able to continue committing bad acts. This reality may be counterbalanced by other benefits from ensuring review by government actors, but it’s still a meaningful tradeoff.

Another enforcement benefit for SROs is that they can enforce their rules and simply expel bad actors who refuse to provide information. What does the layer of government review do here? Is the SEC going to be able to approve an SRO expelling a member asserting its 5th amendment rights? This creeping governmentalization might make it possible for SRO members to stonewall and to refuse to cooperate in investigations as any expulsion would be express government action. There will be many downstream implications from turning an SRO action into an SEC action.