698 F.Supp.3d 147
D.D.C.2023Background
- FINRA is a privately organized, privately funded self‑regulatory organization (SRO) registered under the Exchange Act; the SEC reviews and may abrogate FINRA rules and conducts de novo review on appeal but does not run day‑to‑day enforcement.
- FINRA brought a disciplinary proceeding against broker Eugene Kim alleging unethical conduct in a private offering; FINRA currently seeks a $30,000 fine and ~$$16,000 in disgorgement and does not presently seek a bar or expulsion.
- Kim sued in district court asserting (inter alia) Article II Appointments Clause and removal‑power violations (claiming FINRA is a state actor), a private nondelegation claim, First Amendment claims, and Sherman Act and other claims; he moved for a TRO and preliminary injunction to stay FINRA’s enforcement.
- The D.C. Circuit previously granted an injunction pending appeal in a different case (Alpine) raising similar structural constitutional claims; the panel concurrence raised concern about FINRA’s structure but the underlying facts (expedited proceedings and potential expulsion) were more urgent than here.
- The district court held a multi‑hour hearing, concluded Kim had not met the heavy burden for emergency relief, and denied the TRO/PI: Kim is unlikely to succeed on the merits, does not face irreparable harm given the procedural posture and likely monetary sanctions, and the equities/public interest weigh against a stay of FINRA enforcement.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Appointments Clause / Removal power | FINRA hearing officers and structure violate Article II because FINRA acts with governmental authority; removal/appointment protections apply. | FINRA is a private entity and not a government actor; Lebron test requires permanent government control which is absent. | Court: unlikely Kim will succeed; FINRA is likely not a state actor and Article II claims fail. |
| State‑action for constitutional claims | FINRA’s regulatory role, SEC oversight, and statutory scheme produce a close nexus/state action. | SEC oversight is supervisory/appellate, not permanent control or joint action; FINRA exercises independent enforcement discretion. | Court: state‑action theories fail here (no traditional public function, compulsion, or joint action). |
| Private nondelegation | Congress unlawfully delegated executive/regulatory power to a private entity (FINRA). | Exchange Act preserves SEC supervisory authority (rule approval, de novo review, power to suspend/limit FINRA), so FINRA functions subordinately. | Court: claim unlikely to succeed; longstanding precedents uphold SRO arrangements where the agency retains oversight. |
| TRO/Preliminary injunction factors / jurisdiction | Immediate stay required to avoid irreparable constitutional injury and reputational harm; Axon exception applied to some constitutional claims. | No imminent irreparable harm (hearing months away; mostly monetary sanctions); Axon limits district court jurisdiction for claims subject to SEC review; public interest favors continued SRO enforcement. | Court: denied TRO/PI — Kim failed to show likelihood of success or irreparable harm; balance of equities and public interest strongly favor FINRA; some claims also lack district court jurisdiction. |
Key Cases Cited
- Lebron v. Nat’l R.R. Passenger Corp., 513 U.S. 374 (state‑actor test requires permanent government control)
- Herron v. Fannie Mae, 861 F.3d 160 (D.C. Cir.) (Lebron application regarding government‑created corporations)
- Sunshine Anthracite Coal Co. v. Adkins, 310 U.S. 381 (private bodies may act constitutionally where they function subordinately to government oversight)
- Free Enterprise Fund v. Public Company Accounting Oversight Bd., 561 U.S. 477 (structure of government‑created PCAOB contrasted with private SROs)
- Lucia v. SEC, 138 S. Ct. 2044 (distinguishing ALJ appointment questions for federal officers)
- Manhattan Community Access Corp. v. Halleck, 139 S. Ct. 1921 (private entity state‑action frameworks)
- Brentwood Acad. v. Tenn. Secondary Sch. Athletic Ass’n, 531 U.S. 288 (factors for attributing private conduct to the state)
- Axon Enterprise, Inc. v. FTC, 598 U.S. 175 (district‑court jurisdiction limits and exception for collateral constitutional challenges)
- Keller v. State Bar of Cal., 496 U.S. 1 (compelled association and dues doctrine)
- Winter v. Nat. Res. Def. Council, 555 U.S. 7 (standard for preliminary injunctive relief)