FINRA Under Fire: Constitutional Challenges Mount Against the Industry's Private Regulator

For decades, the Financial Industry Regulatory Authority (“FINRA”) has functioned as the unavoidable gatekeeper of the broker-dealer industry—a private corporation wielding what critics increasingly argue is governmental power, without the constitutional accountability that governmental power demands. That arrangement is now under sustained attack in multiple federal courts, with challenges targeting FINRA’s authority over both registrants and individuals who have not registered with FINRA. Recent rulings from the Sixth Circuit and the DC Circuit suggest that some federal judges share those concerns, even while stopping short of acting on them—and a new complaint filed in Delaware pushes the challenge further still.

The Structure Under Attack

FINRA’s position in American law is an odd one. FINRA is incorporated as a private Delaware corporation, yet it functions as the sole registered national securities association under the Securities Exchange Act of 1934. Membership is not optional: broker-dealers must join to participate in the industry. FINRA investigates suspected violations, prosecutes actions through its Department of Enforcement, and adjudicates them before its own internal hearing officers—all before any government agency or official reviews or approves its actions. Once the SEC approves FINRA rules, they carry the force of law.

Critics have long noted the obvious tension. A private corporation that simultaneously investigates, prosecutes, and adjudicates raises hard questions about the separation of powers, the right to a jury trial, and basic due process—questions that the Supreme Court’s 2024 decision in SEC v. Jarkesy brought into sharp focus. In Jarkesy, the Supreme Court held that civil penalty claims rooted in the common law require adjudication before a jury in an Article III court, not an in-house administrative agency tribunal. The ripple effects of that holding are significant.

Alpine Securities and the D.C. Circuit: The First Crack

The most sustained constitutional challenge to FINRA’s structure to date played out in the D.C. Circuit in Alpine Securities Corporation v. FINRA. Alpine was a registered broker-dealer that, beginning in 2022, faced FINRA sanctions for allegedly violating its rules. When FINRA moved to expel Alpine from membership entirely through an expedited proceeding—the regulatory equivalent of a corporate death penalty, effective immediately and before any SEC review—Alpine filed a constitutional challenge in federal district court.  Alpine challenged both the expedited proceeding itself and the attempt to deregister Alpine without review by the SEC.

The challenge framed the constitutional problem as a dilemma with no comfortable answer for FINRA. If FINRA is a private entity, then Congress has handed it too much governmental authority without adequate oversight, in violation of the private nondelegation doctrine. If it is instead a governmental entity, then FINRA’s hearing officers wield executive power without being properly appointed under the Appointments Clause. The district court nevertheless denied relief, finding FINRA is likely not a state actor and concluding that SEC oversight is sufficient. Alpine appealed.

In July 2023, the D.C. Circuit’s three-judge panel granted an emergency injunction pending appeal. Judge Walker, concurring, concluded that FINRA hearing officers who enforce securities laws and decide parties’ rights look remarkably like SEC administrative law judges—and if the ALJs in Lucia v. SEC exercised significant executive authority requiring proper appointment, then FINRA’s hearing officers likely do too. Judge Walker identified two specific defects: no governmental authority appoints FINRA’s hearing officers, and the SEC lacks meaningful removal power, leaving FINRA hearing officers insulated from presidential supervision in likely violation of Article II.

The full merits decision came down on November 22, 2024, and proved narrower than many had hoped. The majority found that Alpine had demonstrated a likelihood of success on its nondelegation claim, but only to the extent that FINRA’s expulsion orders take effect immediately before any SEC review—effectively barring a firm from the securities industry without any governmental check on that outcome. On that narrow basis, the court enjoined FINRA from expelling Alpine until the SEC had an opportunity to review any expulsion order. The court declined to reach Alpine’s Appointments Clause arguments, the jury trial question, and broader constitutional challenges.

The majority drew a distinction that will matter going forward: It was careful to separate FINRA proceedings that enforce only FINRA’s own rules from proceedings that enforce federal securities laws or regulations, signaling that the latter could present a bigger constitutional problem. In arguing against the broader injunction urged by the dissent, the majority twice noted that FINRA was not enforcing any federal law or SEC regulation against Alpine in the underlying proceeding—an implicit acknowledgment that a case involving federal law enforcement might come out differently.

Judge Walker would have gone much further. In his view, FINRA exercises significant executive authority without adequate SEC review throughout its proceedings, not just at the moment of expulsion, and he would have enjoined the expedited proceeding in its entirety.

The Supreme Court’s involvement did not resolve things. Chief Justice Roberts denied a stay application in March 2025. The Supreme Court then denied certiorari outright on June 2, 2025—the same day, notably, that FINRA moved to propose a rule change that would require SEC review before any expulsion takes effect, an acknowledgment that the D.C. Circuit’s nondelegation ruling had identified a real vulnerability. The constitutional questions themselves remain unresolved. After cert was denied, the case returned to the district court, where Alpine’s broader claims under the Appointments Clause and related theories are still pending. Interestingly, the Trump administration opposed Alpine’s cert petition—not by defending FINRA’s constitutional structure, but on the narrower ground that the preliminary injunction posture made the case a poor vehicle for resolving questions of such consequence. 

The Sixth Circuit’s Smith Decision: A Procedural Win for FINRA, A Substantive Warning

The most consequential recent development came from the Sixth Circuit on March 27, 2026, in Smith v. SEC and FINRA, a decision that is considerably more nuanced than the bottom-line result uggests.

Eric S. Smith was the majority owner, chairman, and CEO of a holding company that wholly owned a registered FINRA broker-dealer. Smith never personally registered with FINRA, claiming an exemption on the theory that he was not actively managing the securities business. That factual premise, the court noted dryly, was wobbly at best: between 2010 and 2015, Smith had directly managed debt offerings, prepared offering documents containing false statements, and personally solicited $130,000 from investors. FINRA eventually caught up with Smith, imposing a lifetime industry bar and a restitution order exceeding $130,000.

Smith challenged both FINRA’s jurisdiction over him and the constitutionality of the proceedings. The Sixth Circuit’s three-judge panel denied his petition. With regard to jurisdiction, the majority held that because Smith controlled a FINRA member firm, he qualified as a “person associated with a member” under the Exchange Act, bringing Smith within FINRA’s reach, regardless of his refusal to register. On the constitutional questions—specifically Smith’s Seventh Amendment right to a jury trial before an Article III judge—the Sixth Circuit found those claims procedurally barred, holding that Smith had never raised them before the SEC and that his three arguments excusing that failure did not hold up. Smith also had raised nondelegation and Appointments Clause arguments, but withdrew them during the proceedings after conceding that FINRA functions as an adjunct to the SEC, rather than a fully independent private actor.

But the majority did not simply deny the petition and move on. In a lengthy passage of dicta, Judge Readler, writing for the majority, walked through the Jarkesy analysis and concluded that if Smith had properly exhausted his constitutional arguments, then he may well have been entitled to a jury trial because the statutes FINRA enforced against Smith are analogous to common law fraud and the restitution remedy appears legal rather than equitable. And, the public rights exception (which often acts as an escape hatch for administrative adjudication), would have been difficult to invoke against someone who explicitly refused to consent to FINRA’s jurisdiction. In short, the Sixth Circuit declined to hold the proceedings unconstitutional only because of a procedural failure, not because the arguments lacked merit.

Judge Murphy’s Concurrence: The Deeper Question

The most far-reaching opinion in Smith came from Judge Murphy in a separate concurrence. Agreeing that the case had to be dismissed on exhaustion grounds, Judge Murphy devoted six pages to a question the majority left open: even if Congress cannot directly force a defendant to forgo Article III and jury trial rights, as Jarkesy suggests, can it accomplish the same thing indirectly, by conditioning the right to enter the brokerage business on waiver of those protections?

Judge Murphy traced the history of securities self-regulation from the voluntary private exchanges of the early nineteenth century, where brokers freely chose membership and the arbitration requirements that came with it, to the mandatory regime Congress created in 1983, under which no one may engage in the securities business without joining a registered association. That shift, he argued, fundamentally changes the constitutional picture. What once looked like voluntary contractual waiver now looks like a government-imposed condition on the right to work—and the unconstitutional-conditions doctrine limits how far the government can go in extracting waivers of constitutional rights as the price of a license.

Judge Murphy declined to resolve the question, acknowledging that the Supreme Court has not yet developed a workable test for procedural rights in this context. But his point was hard to miss: the historical justification FINRA and the SEC invoke—a long tradition of voluntary self-regulation—was built in a world where participation was a choice. That world disappeared in 1983, and the constitutional consequences of that change have never been squarely confronted.

Judge Bloomekatz concurred in the judgment only, writing separately to question whether the majority should have addressed the constitutional merits at all, given that the exhaustion bar fully disposed of the case. That the panel chose to signal its constitutional views anyway was itself a deliberate act.

The Delaware Complaint: Registered Members Push Back

Although Alpine and Smith approached the problem from different angles, a complaint filed April 1, 2026 in the U.S. District Court for the District of Delaware consolidates all of the major constitutional theories into a single direct challenge brought by fully registered FINRA members.

Boustead Securities, LLC, Sutter Securities Inc., and their CEO Keith C. Moore filed suit after FINRA’s Department of Enforcement publicly filed a disciplinary complaint against them in January 2026.

The Delaware plaintiffs press five constitutional theories simultaneously: (1) FINRA unconstitutionally exercises executive power as a private corporation under the nondelegation doctrine; (2) Jarkesy entitles the Delaware plaintiffs to a jury trial that FINRA’s in-house process cannot provide; (3) FINRA’s hearing officers are “Officers of the United States” subject to the Appointments Clause, but appointed only by FINRA’s private CEO; (4) the Fifth Amendment’s due process guarantee is violated by adjudicators who are selected, paid, and supervised by the same organization that prosecutes the case; and (5) the entire structure violates separation of powers because FINRA’s hearing officers are wholly insulated from presidential removal.

The Delaware complaint differs from its predecessors in the Delaware plaintiffs’ vivid account of how FINRA’s enforcement regime inflicts injury at the moment of public accusation, before any hearing takes place. Before the Enforcement complaint was even filed, FINRA allegedly contacted Nasdaq and instructed it not to approve IPOs in which Boustead served as underwriter. After the complaint was filed publicly, Sutter’s clearing firm terminated its relationship due to pressure from the proceeding. Personal brokerage accounts belonging to Moore and another principal were closed by a third firm whose representative told Moore that they had “no choice.” To argue that the plaintiffs are not facing hypothetical harm, the complaint details concrete market exclusions that occurred within days of FINRA’s filing. The plaintiffs invoke the Supreme Court’s 2023 holding in Axon Enterprises v. FTC that being subjected to an unconstitutionally structured proceeding is itself a present injury that cannot be remedied after the fact, the same theory that drove the initial emergency relief in Alpine.

Conclusion

The through-line connecting Alpine, Smith, and the Delaware complaint is the collision between the historical story FINRA tells about itself and the regulatory reality it actually inhabits. FINRA justifies its internal adjudicatory model by appealing to centuries of voluntary self-regulation in the securities industry—private clubs, consensual arbitration, members who chose to join knowing the rules. But the voluntary nature of membership requirements ended in 1983, when Congress made membership mandatory and FINRA became the only path into the broker-dealer industry. What was once voluntary is now compelled, and the constitutional consequences of that transformation remain unresolved, across multiple circuits.

The D.C. Circuit found a likely nondelegation violation in FINRA’s power to expel members without prior SEC review, then sidestepped the broader constitutional questions. The Sixth Circuit denied Smith’s petition on procedural grounds but went out of its way to say his Seventh Amendment arguments had real force—and Judge Murphy’s concurrence posed a structural question about mandatory membership regimes that no court has answered. FINRA, for its part, responded to the cert denial in Alpine by immediately proposing a rule change to shore up the specific vulnerability the D.C. Circuit identified, suggesting it understands that the ground beneath its enforcement model is less stable than it once appeared.

Whether that kind of incremental adaptation is enough, or whether the broader constitutional challenges now pending in Delaware and other federal courts will eventually force a more fundamental reckoning, is the question hanging over every FINRA enforcement action filed today.