A Private Plaintiff Cannot Sue FINRA for a Violation of Its Own Rules

In Turbeville v. FINRA, 2017 WL 4938821 (11th Cir. Nov. 1, 2017), a panel of the Eleventh Circuit held that a former registered representative’s purported state-law claims against FINRA were properly dismissed because there exists no private right of action against FINRA, a self-regulatory organization (“SRO”), for alleged violations of its own rules.

In 2009, FINRA filed an administrative complaint against Turbeville, who was then a registered representative of a FINRA-affiliated firm, alleging that Turbeville had committed securities fraud in his recommendations to an elderly couple. A FINRA hearing panel found that Turbeville had violated FINRA’s rules, barred him from associating with any FINRA-affiliated firm, and assessed other penalties.  FINRA’s National Adjudicatory Council (“NAC”), the appeals board established as part of FINRA’s multi-layered dispute resolution procedure, affirmed.  Turbeville then sought review by the SEC, as the Exchange Act entitled him to do, but withdrew that appeal before the SEC reviewed his case.

While the NAC appeal was pending, FINRA learned that Turbeville had filed a defamation action in Florida state court against the elderly investors who had testified against him at the FINRA hearing. After investigation, FINRA sent Turbeville a “Wells Notice”—a notice that FINRA believes it has cause to institute disciplinary proceedings and inviting the recipient to respond—based on Turbeville’s apparent violation of a FINRA rule prohibiting retaliation.  Turbeville, who no longer worked in the securities industry, disputed the Wells Notice, and FINRA ultimately removed the Wells Notice form Turbeville’s publicly-available “BrokerCheck” report.

Turbeville sued FINRA in Florida state court, alleging defamation, abuse of process, intentional interference with a prospective advantage, and conspiracy. FINRA removed the case to federal court.  Turbeville filed a motion to remand, and FINRA filed a motion to dismiss.  The district court denied the motion to remand and granted the motion to dismiss.

The Eleventh Circuit, in an opinion written by Judge Tjoflat and joined by Judge Rosenbaum and Judge Danny C. Reeves visiting from the Eastern District of Kentucky, affirmed. In analyzing the jurisdictional question, the court looked to the substance of Turbeville’s ostensibly state-law claims and concluded that they were “fundamentally a challenge to an SRO’s compliance with its internal rules while carrying out its regulatory and enforcement functions.”  Thus resolution of the case would require interpretation of FINRA’s rules, “[a]nd because those rules and regulations are promulgated according to the Exchange Act’s mandates, their interpretation unavoidably involves answering federal questions.”  Indeed, Turbeville’s action against FINRA “turns on the existence of a federally supplied right of action,” because if such a right of action were to exist, it would have to be supplied by the Exchange Act, which “creates SROs, vests them with a first-line role in the enforcement of federal securities law, and mandates creation of internal rules to govern their disciplinary and disclosure actions.”

But, the court continued, no such cause of action exists. “Congress did not intend to create a private right of action for plaintiffs seeking to sue SROs for violations of their own internal rules.”  The Exchange Act bestows no such right, the court held—“[i]n fact, the internal appeals and administrative-review processes created by the Exchange Act confirm that no private right exists.”  Those internal processes, enacted in accordance with federal law, rule out a “parallel” private right of action in court—“If actions like Turbeville’s are permitted, fifty state courts would be authorized to supervise FINRA’s regulatory conduct and its application of its internal, SEC-approved rules through the vehicle of state tort law,” a result inconsistent with the Exchange Act.

The bottom line, at least in the Eleventh Circuit, is that a registered representative must go through the FINRA hearing/NAC/SEC/Court of Appeals process set forth in the Exchange Act, and cannot resort to a state-law action against FINRA.  “Although a person regulated by an SRO might find the prescribed remedies incapable of assuaging the reputational harm he suffered as a result of the SRO’s regulatory and disciplinary conduct,” the court noted, “he chose to accept those limitations on recovery by affiliating himself with an SRO-governed firm.”

Posted by Valerie Sanders.

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