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Is FINRA’s Immunity from Private Lawsuits Unconstitutional?

A lawsuit filed by broker-dealer Standard Investment Chartered has been appealed to the US Supreme Court. Standard alleges that FINRA (Financial Industry Regulatory Authority), which is a self-regulatory organization which performs regulatory duties of the Securities and Exchange Commission, lied to its members to get them to approve a merger with the New York Stock Exchange (NYSE). Standard and other groups that filed friend of the court briefs have asked the Supreme Court to review the matter, claiming that FINRA has been given unchecked power.

Because FINRA acts on behalf of the SEC, courts have granted it immunity from private lawsuits. The issue in the case is how much immunity is appropriate to grant FINRA. Friend of the court briefs argue that the Constitution demands “checks on delegated power” like the power granted by the SEC to FINRA. In addition, they contend that “absolute immunity” is a serious abdication of oversight responsibilities.
FINRA has been placed on the defensive as of late for failing to discover serious frauds such as the Madoff Ponzi scheme. FINRA must file any answer to Standard’s petition by December 6, 2011.
Heimanson & Wolf represents investors against broker-dealers in FINRA arbitrations.

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