Who Watches the Watchers?: FINRA, Self-Regulatory Organizations, and the Next Evolution of Appointment and Removal Jurisprudence

There are private, non-profit corporations exercising significant executive power. Known as self-regulatory organizations (SROs) these non-governmental organizations make binding rules and sometimes enforce statutory law governing massive industries. One such SRO is the Financial Industry Regulatory Authority (FINRA). In 2022 alone, FINRA permanently barred 227 individuals and suspended 328 individuals from the financial industry, imposed $54.5 million dollars in fines, ordered $26.2 million dollars in restitution, and referred 663 cases for prosecution. FINRA’s regulatory jurisdiction is massive. In 2022, it oversaw 3,378 securities firms including 150,647 branch offices and 620,882 individuals nationwide. This immense power is wielded not by the government, but rather by a private non-profit corporation. FINRA’s oversight of the securities industry and enforcement of securities law is constitutionally suspect. In our system of delegated power, enforcing federal law is a function of the Executive Branch. Even if FINRA were a state actor, its agents who adjudicate complaints and levy sanctions do not meet the requirements of the Appointments Clause and are not properly subject to presidential removal. The Supreme Court has held that an individual who exercises “significant authority” pursuant to the laws of the United States is an Officer of the United States. “Significant authority” includes rulemaking, adjudication, the issuing of advisory opinions, and eligibility determinations––all tasks that FINRA Officers routinely participate in. FINRA’s Hearing Officers seem an awful lot like Officers of the United States. Hearing Officers are tasked by statute with enforcing the nation’s securities laws. They can levy sanctions that carry the force of federal law. Hearing Officers demand testimony, rule on motions, regulate the course of a hearing, decide the admissibility of evidence, and enforce compliance with discovery orders by punishing contempt. This Note argues that FINRA employees that exercise the same power as Officers of the United States are Officers of the United States. They must be appointed according to the Appointments Clause and subject to presidential removal as outlined by Supreme Court jurisprudence. This Note argues that the Supreme Court should hold that FINRA is governmental for Constitutional purposes. It then outlines a judicial and a legislative remedy to bring FINRA’s officer-like employees into compliance with the Appointments Clause and Supreme Court removal jurisprudence. It concludes by advocating for the judicial remedy as both practically feasible and within the scope of the recent jurisprudence of the Roberts Court.