By Robert Fusfeld
The Securities and Exchange Commission has ruled that it is deprived of jurisdiction over an appeal from a contingent sanction imposed by the Financial Industry Regulatory Authority when FINRA lifts the sanction while the appeal is pending. The SEC also ruled that FINRA cost assessments and findings of violations are not final disciplinary actions subject to Commission appellate jurisdiction. See Sharemaster, Exchange Act Rel. 65570, October 14, 2011.
FINRA sanctioned Sharemaster for failing to file an annual audit by a firm registered with PCAOB. At issue was whether or not an exemption from that requirement applied to Sharemaster. FINRA's hearing panel found that Sharemaster was not subject to the exemption, ordered it suspended until it filed a compliant report and imposed costs of $1,785. Sharemaster appealed the FINRA sanction to the SEC. It did not request a stay of the decision under Commission Rule 401(d).
While the appeal was pending Sharemaster filed a compliant annual report and the suspension was lifted.
Under Exchange Act Section 19(d) the Commission has jurisdiction over FINRA action that: 1) imposes a final disciplinary sanction; 2) denies membership or participation of an applicant; 3) prohibits or limits any person's access to FINRA services; or 4) bars any person from associating with a FINRA member.
The Commission dismissed Sharemaster's appeal. It ruled that the FINRA imposed suspension was not a final sanction as the suspension was contingent and had been lifted by FINRA. It dismissed Sharemaster's argument that the finding of a violation and assessment of costs were final rulings.
The Commission opinion concluded that the only sanction potentially subject to appeal was the suspension. Because it had been lifted there was no jurisdiction. It found the costs not an appealable sanction as under FINRA rules costs are not deemed sanctions. In ruling that the finding of violation was not an appealable sanction the Commission analogized to civil contempt actions in federal court. Once the civil contempt is purged by compliance with the order, appellate jurisdiction is moot.
(Robert Fusfeld is on the faculty of the Institute for Public Policy Studies at the University of Denver where he teaches graduate and undergraduate courses. From 1975 until his retirement in 2006 he was an SEC enforcement attorney and managed the SEC's Denver office trial unit for 15 years. He publishes a blog commenting on SEC administrative proceeding decisions at www.secteaparty.blogspot.com).