Securities Litigation

FINRA celebrated its 75^th Anniversary this September 18. It is the "largest independent regulator for all securities firms doing business in the United States," with a notionally voluntary membership of over 4,100 securities firms. Its mission is protecting investors, and FINRA is the primary cop on the beat, policing over 634,000 registered securities representatives. FINRA employs 3,400 people in 20 offices. It monitors 6 billion share trades a day and fined Wall Street over $74 million last year. Read the release here. FINRA is a voluntary membership organization you have to join if you want to be a broker-dealer and it enforces its own rules, using the delegated power of the government. It's a neither-fish-nor-fowl legacy of unconstitutional New Deal industry codes, tweaked with enough oversight and process to have survived after the "Sick Chicken Case" and later challenges. The industry supports it and fights it. It's a love-hate relationship. And it works. The securities industry has a long tradition of self-regulation (or cartel behavior - depending on your point of view), since the 1792 Buttonwood Agreement, in which the 24 signatories pledged to deal only with each other and fixed commissions. See it here. After the Stock Market Crash of 1929, Roosevelt's New Deal included the United States' two principal securities laws: The Securities Act of 1933 (regulating new issues) and the Securities Exchange Act of 1934 (regulating exchanges and secondary market trading). The '34 Act retained exchanges (NYSE was an outgrowth of Buttonwood) as self-regulatory organizations ("SRO's") - a compromise to direct government regulation feared too vigorous. The National Industrial Recovery Act (another "100 Days" law) allowed industries to propose their own Codes of conduct, promulgated then by Presidential directive and enforced by the government. The Supreme Court declared NIRA and the Codes an unconstitutional delegation of legislative power in the "Sick Chicken Case." See ALA Schechter Poultry Corp. v. United States, 295 U.S. 495 (1935). But the securities industry worked to retain its self-regulatory regime, which resurfaced in the 1938 Maloney Act, creating '34 Act § 15A for "registered securities associations." See SEC Comm'r George C. Mathews Address to Investment Bankers Ass'n of Am. (Oct. 23, 1938), here. The NASD registered in 1939 and remained the only such association until well into the 1970s. Federal courts since have upheld its constitutionality. See, e.g., Todd & Co. v. SEC, 557 F. 2d 1008 (3d Cir. 1977). In 2007, NASD joined with the member-regulation, enforcement and arbitration functions of the NYSE to become the Financial Industry Regulatory Authority ("FINRA"). Happy birthday, FINRA. For a more detailed history, see The Institution of Experience: Self-Regulatory Organizations in the Securities Industry, 1792-2010 (SEC Historical Society), here. Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Managing Partner of the Nashville office, Tom is licensed in Tennessee, Texas and Louisiana. He has over 28 years' experience representing financial institutions in litigation, regulatory and compliance matters. © 2014 by Thomas K. Potter, III (all rights reserved)