Last Friday, Forbes contributor Bill Singer wrote a piece on former president of North American Clearing, Inc. John Busacca’s legal run-in with the SEC. The article speculates, “With a split in the federal Circuits, the issue of Due Process protection at FINRA may soon find its way to the Supreme Court.”
The Financial Industry Regulatory Authority (otherwise known as “FINRA”) is the product of a 2007 merger between the NYSE’s former enforcement arm and the National Association of Securities Dealers (NASD). Although FINRA is technically a private entity, it works closely with government regulators like the SEC to create and enforce financial compliance measures on member brokerage firms. In 2011 alone, FINRA imposed $63 million in fines for compliance violations.
With the SEC's blessing, FINRA fined Busacca $30,000 and suspended him for six months because he purportedly failed to supervise his firm's transition to a new books- and records-keeping system in a reasonable manner, resulting in widespread accounting errors. Busacca appealed the sanction to the Eleventh Circuit, arguing, among other things, that FINRA violated his Fifth Amendment right to due process of law by denying him access to documents that he believed were "vital to his defense." Busacca v. S.E.C., No. 10-15918 Non-Argument Calendar, at 6 (11th Cir. Dec. 28, 2011) (mem. op.).
As the Eleventh Circuit pointed out, however, Busacca's due process challenge presumes that FINRA operates as a "government actor" bound by the Due Process Clause of the Fifth Amendment; an issue that is by no means well settled:
We have not yet determined whether FINRA is a government actor subject to the Clause’s requirements. Other circuits have reached conflicting holdings on this question. See, e.g., D’Alessio v. S.E.C., 380 F.3d 112, 120 n.12 (2d Cir. 2004) (noting that the NASD, FINRA’s predecessor, “is not a state actor subject to due process requirements”); Rooms v. S.E.C., 444 F.3d 1208, 1214 (10th Cir. 2006) (finding that due process requirements apply to the NASD). To the extent the Due Process Clause applies to FINRA proceedings, its core demand is an opportunity to be heard “at a meaningful time and in a meaningful manner.” Armstrong v. Manzo, 380 U.S. 545, 552, 85 S. Ct. 1187, 1191, 14 L.Ed.2d 62 (1965); see Nat’l Ass’n of Bds. of Pharm. v. Bd. of Regents of the Univ. Sys. of Ga., 633 F.3d 1297, 1317 (11th Cir. 2011). Nevertheless, in the context of criminal cases, the Supreme Court has emphasized that “[t]here is no general constitutional right to discovery” and that “the Due Process Clause has little to say regarding the amount of discovery which the parties must be afforded.” Weatherford v. Bursey, 429 U.S. 545, 559, 97 S.Ct. 837, 846, 51 L.Ed.2d 30 (1977).
Id. at 6-7. When you consider some of the other tough questions that might arise from FINRA's characterization as a "government actor" (e.g., would FINRA then be entitled to government immunity in certian cases?), it's no wonder the Eleventh Circuit side-stepped the issue in Busacca.
- Ilya Shapiro, Financial Regulators Are Not Above the Constitution, Cato @ Liberty (Oct. 26, 2011, 11:55 AM).
*Hat tip to David Hargis, an associate at Moulton & Arnery, LLP, for bringing this circuit conflict to my attention.
(Image courtesy of Brian Holsclaw)