In Turbeville v. FINRA, et al, the Eleventh Circuit reaffirmed the principle that a FINRA member firm, or a registered representative, has no private right of action to sue FINRA in court for a violation of its own internal rules. The Eleventh Circuit reasoned that the Exchange Act’s silence regarding the existence of a private right of action clearly indicates Congress’ intent not to provide one. In other words, an aggrieved member firm or registered representative is limited to FINRA’s internal appeal and review process, regardless of its alleged or perceived shortcomings, to remedy any injury purportedly suffered as a result of FINRA’s alleged violation of its internal rules.
The factual history of this case began nearly a decade before the Eleventh Circuit’s recent opinion. In 2009, FINRA filed a complaint against a registered representative alleging that he made unsuitable recommendations to unsophisticated, elderly clients with a low risk tolerance to invest in collateralized mortgage obligations (“CMOs”). After a full hearing, the registered representative was barred from the industry and ordered to pay restitution to his clients. The registered representative appealed the decision to FINRA’s National Adjudicatory Council (“NAC”), which ultimately affirmed the findings of the hearing panel. As a last resort, the registered representative appealed the NAC decision to the SEC.
While the appeal to the NAC was pending, FINRA learned that the registered representative had filed a lawsuit in a Florida state court against the elderly clients who had testified against him at the FINRA hearing and issued a Wells Notice to him. The Wells Notice was posted on the registered representative’s BrokerCheck page and described FINRA’s initial findings that he “filed a false complaint against and attempted to intimidate witnesses in a FINRA disciplinary action, in violation of FINRA Rule 2010.” The registered representative disputed FINRA’s findings and FINRA ultimately withdrew and removed the Wells Notice from the BrokerCheck report. However, the registered representative filed a complaint in a Florida state court against FINRA alleging that FINRA violated its own regulations in connection with the publication of the Wells Notice. He asserted causes of action under Florida law for defamation, abuse of process, intentional interference with a prospective advantage and conspiracy, alleging that he lost potential clients as a result of the publication of the Wells Notice.
FINRA removed the case to federal court arguing that the complaint, while couched in state law claims, in reality presented federal question allegations because the complaint was based on FINRA’s internal rules. On appeal, the Eleventh Circuit agreed with FINRA, stating that “the jurisdictional question turns on whether the suit ‘arose under’ Section 27(a) of the Exchange Act” which “grants the federal district courts exclusive jurisdiction over all suits brought to enforce any liability or duty created by the Exchange Act or the rules and regulations thereunder.” The Eleventh Circuit found that the causes of action in the complaint “rest expressly on allegations that FINRA violated its own rules and exceeded its jurisdictional grant.” Therefore, the claims could not be adjudged without determining whether FINRA adhered to its internal rules in investigating the registered representative and publishing the Wells Notice on the BrokerCheck report. And, because “those rules and regulations are promulgated according to the Exchange Act’s mandate, their interpretation unavoidably involves answering federal questions.” Notably, the Eleventh Circuit also held that the suit “does not just raise a federal question; it turns on the existence of a federally supplied cause of action.” Accordingly, the Eleventh Circuit found that removal was proper.
Having found federal jurisdiction over the dispute, the Eleventh Circuit turned to FINRA’s substantive argument that the claims should be dismissed because Congress did not intend to create a private right of action for plaintiffs seeking to sue self-regulatory organizations (“SROs”) for violations of their own internal rules. The Eleventh Circuit found that the Exchange Act provides no evidence that Congress intended to create such a private right of action. To the contrary, the court observed that the “internal appeals and administrative-review processes created by the Exchange Act confirm that no private right exists.” FINRA’s appeals process has its own remedies (i.e., reversal of the hearing board’s disciplinary actions or removal of information, shown to be inaccurate, from BrokerCheck). If plaintiffs could sue FINRA in state court then “fifty state courts would be authorized to supervise FINRA’s regulatory conduct and its application of its internal, SEC-approved rules through the vehicle of state tort law.”
In reaching its conclusion, the Eleventh Circuit noted the fact that the remedies available under the Exchange Act may “leave something to be desired does not change the analysis.” Specifically, the court stated “[a]lthough a person regulated by an SRO might find the prescribed remedies incapable of fully assuaging the reputational harm he suffered as a result of the SRO’s regulatory and disciplinary conduct, he chose to accept those limitations on recovery by affiliating himself with an SRO-governed firm.”
The Bottom Line
Individuals looking to become registered representatives at FINRA member firms should keep in mind the limited remedies available to them when it comes to challenging FINRA disciplinary investigations, or publications on their BrokerCheck reports. As the Eleventh Circuit makes clear, challenges to FINRA’s own compliance with its policies and procedures are limited to the internal appeal and review process notwithstanding the recognition that they may not completely remedy the harm to a registered representative’s reputation and business from incorrect disclosures. Of course, adhering to FINRA rules is the best way to avoid any such issues.