Oct 5 (Reuters) - The Financial Industry Regulatory Authority (FINRA) cannot go to court to collect fines it says brokerages and brokers have to pay in disciplinary cases, a federal appeals court ruled on Wednesday.

A three judge panel of the U.S. Court of Appeals for the Second Circuit in New York threw out a $1.3 million judgment from a federal district court in FINRA's favor. The judgment was against Fiero Brothers Inc., a now defunct New York-based brokerage, and its president John J. Fiero.

The court wrote that the Exchange Act, which allows self-regulatory organizations to oversee parts of the securities industry, doesn't give FINRA a right to enforce fines by filing lawsuits.

The decision could end a legal battle that began in 2000 when FINRA's predecessor, the National Association of Securities Dealers, permanently barred Fiero from the securities industry, expelled his firm, and jointly fined Fiero and the firm $1 million for allegedly violating short selling rules.

FINRA first sued Fiero and the firm in New York state court, a process that ended in 2008 when the state's highest court also threw out a judgment in FINRA's favor.

Fiero then went to federal court seeking a declaratory judgment that FINRA didn't have authority to collect the fine through the courts. FINRA counter-sued, saying it had a contractual right to collect the $1.3 million.

Lawyers disagreed about the impact of the case.

Martin Kaplan, a lawyer for Fiero, said in a written statement that the decision changes the regulatory landscape in "a profound way," with the court finding that FINRA never had the authority to enforce fines using the courts.

"It's a game changer," said Matthew Farley, a securities lawyer for Drinker Biddle & Reath in New York. FINRA has tried to collect unpaid fines in court cases for about 20 years, he said.

But that strategy is on the decline, said Brian Rubin, a securities lawyer for Sutherland Asbill & Brennan in Washington, D.C. Current FINRA guidelines for sanctions discourage fines if a broker is barred, he said. Brokers who are suspended and fined aren't allowed to return to the industry unless they pay the fine, he said.

For its part, FINRA spokeswoman Nancy Condon said the regulator "will continue to review the ruling and weigh our options."

"The decision will not have any impact or restrict our ability to enforce FINRA rules and securities laws, to discipline firms or to protect investors," she said in a statement.

The case is Fiero et al v. FINRA, U.S. Court of Appeals for the 2nd Circuit, No. 09-1556.

For Fiero et al: Brian Graifman and Martin Kaplan of Gusrae Kaplan Nusbaum.

For FINRA: Terri Reicher.

(Reporting by Suzanne Barlyn)

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