John J. Fiero and Fiero Brothers, Inc. v. FINRA

1
09-1556-cv (L)
John J. Fiero and Fiero Brothers, Inc. v. FINRA
UNITED STATES COURT OF APPEALS 1
FOR THE SECOND CIRCUIT 2
August Term, 2009 3
(Argued: April 6, 2010 Decided: October 5, 2011) 4
Docket Nos. 09-1556-cv(L), 09-1863-cv(XAP) 5
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 6
JOHN J. FIERO and FIERO BROTHERS, INC., 7
8 Plaintiffs-Counter-Defendants-Appellants-Cross- 9 Appellees, 10
11 v. 12
13 FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC., 14
15 Defendant-Counterclaimant-Appellee-Cross- 16 Appellant. 17
18 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 19
20 B e f o r e: JACOBS, Chief Judge, WINTER, and WALKER, Circuit 21 Judges. 22
Appeal from orders of the United States District Court for 23
the Southern District of New York (Victor Marrero, Judge) 24
dismissing a complaint seeking a declaratory judgment, and 25
entering a money judgment on a counterclaim. The principal issue 26
is whether the Financial Industry Regulatory Authority, Inc. has 27
the authority to bring court actions to collect disciplinary 28
fines. We hold that it does not and reverse. 29
30
31

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1 FINRA is a non-profit Delaware corporation that was formed in July
2007, when the National Association of Securities Dealers, Inc. (“NASD”)
consolidated with the regulatory arm of the New York Stock Exchange. See
2
BRIAN D. GRAIFMAN, Gusrae, Kaplan, 1
Bruno & Nusbaum, PLLC, New York, 2 N.Y., for Plaintiffs-Counter- 3 Defendants-Appellants-Cross- 4 Appellees. 5
6 TERRI L. REICHER, Financial 7 Industry Regulatory Authority, 8 Inc., Washington, D.C., for 9 Defendant-Counterclaimant-Appellee- 10 Cross-Appellant. 11
12 WINTER, Circuit Judge: 13
John J. Fiero (“Fiero”) and Fiero Brothers, Inc. (“Fiero 14
Brothers”) (together, “Fieros”) appeal from Judge Marrero’s 15
dismissal of their complaint, which sought a declaratory judgment 16
that, inter alia, the Financial Industry Regulatory Authority, 17
Inc. (“FINRA”) lacks the authority to bring court actions to 18
collect disciplinary fines it has imposed. We hold that FINRA 19
lacks such authority. We therefore reverse the dismissal of the 20
complaint and vacate the money judgment on FINRA’s counterclaim. 21
22
BACKGROUND 23
a) FINRA’s Role 24
FINRA is a “self-regulatory organization” ("SRO") as a 25
national securities association registered with the SEC pursuant 26
to the Maloney Act of 1938, 15 U.S.C. § 78o-3, et seq. See 27
Desiderio v. Nat’l Ass'n of Sec. Dealers, Inc., 191 F.3d 198, 201 28
(2d Cir. 1999). FINRA is the successor to the National 29
Association of Securities Dealers (“NASD”). 1 It “is responsible 30

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Standard Inv. Chartered, Inc. v. Nat’l Ass'n of Sec. Dealers, Inc., 637 F.3d
112, 114 (2d Cir. 2011). As a result of this consolidation, FINRA is the sole
SRO providing member firm regulation for securities firms that conduct
business with the public in the United States. Fin. Indus. Regulatory Auth.,
Inc. v. Fiero, 882 N.E.2d 879, 880 n.* (N.Y. 2008). Much of the facts and
background in this case occurred prior to July 2007, so we will refer to the
appellee as the NASD where appropriate. The distinction is, however,
irrelevant to the merits and our disposition of the case.
2 The entire FINRA COP is contained in the FINRA Manual available at
http://finra.complinet.com.
3
for conducting investigations and commencing disciplinary 1
proceedings against [FINRA] member firms and their associated 2
member representatives relating to compliance with the federal 3
securities laws and regulations." D.L. Cromwell Invs., Inc. v. 4
NASD Regulation, Inc., 279 F.3d 155, 157 (2d Cir. 2002) (quoting 5
Datek Sec. Corp. v. Nat’l Ass’n of Sec. Dealers, Inc., 875 F. 6
Supp. 230, 232 (S.D.N.Y. 1995) (internal quotation marks 7
omitted)). As a practical matter, all securities firms dealing 8
with the public must be members of FINRA. See Sacks v. SEC, 648 9
F.3d 945, 948 (9th Cir. 2011) (citing 72 Fed. Reg. 42,169, 42,170 10
(Aug. 1, 2007); 15 U.S.C. §§ 78c(a)26, 78s(b)) (noting that FINRA 11
is “responsible for regulatory oversight of all securities firms 12
that do business with the public”); see also note 1, supra. 13
FINRA’s disciplinary proceedings are governed by the FINRA Code 14
of Procedure ("FINRA COP"). 2 The FINRA COP has been approved by 15
the SEC, as required by Section 19 of the Securities Exchange Act 16
of 1934. 15 U.S.C. § 78s(b) (describing the required procedure 17
for approval of proposed SRO rule changes). 18
FINRA has the power to initiate a disciplinary proceeding 19

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4
against any FINRA member or associated person for violating any 1
FINRA rule, SEC regulation, or statutory provision. Id. § 2
78s(h)(3). To issue a complaint, FINRA’s Department of 3
Enforcement or Department of Market Regulation must obtain 4
authorization from the FINRA Regulation Board or FINRA Board. 5
FINRA COP § 9211. After a complaint is filed, a hearing panel 6
conducts a hearing and issues a decision. Id. § 9231. Final 7
decisions of the hearing panel may be appealed to the FINRA 8
National Adjudicatory Council ("NAC"), which can affirm, modify, 9
or reverse the hearing panel's decision. Id. §§ 9311, 9349(a), 10
9268-9269. NAC decisions may then be appealed to the SEC, 11
pursuant to 15 U.S.C. § 78s(d), and from the SEC to the United 12
States Court of Appeals, pursuant to 15 U.S.C. § 78y. 15 U.S.C. 13
§§ 78s(d), 78y(a); see also Mister Discount Stockbrokers v. SEC, 14
768 F.2d 875, 876 (7th Cir. 1985). 15
b) The Disciplinary Action Against the Fieros 16
17 Fiero Brothers, a New York corporation, was a FINRA member 18
firm and broker-dealer registered with the SEC. John J. Fiero 19
was the sole registered representative of Fiero Brothers. As 20
such, the Fieros were subject to the regulations and discipline 21
of NASD. 22
On February 6, 1998, NASD’s Department of Enforcement 23
initiated disciplinary proceedings against the Fieros, the merits 24
of which are not pertinent to this appeal. On December 6, 2000, 25
an NASD hearing panel held that the Fieros had violated Section 26
10(b) of the Exchange Act, Rule 10b-5, and FINRA Conduct Rules 27

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5
2110, 2120, and 3370. The hearing panel expelled Fiero Brothers, 1
barred Fiero from associating with any FINRA-member firm in any 2
capacity, and fined the Fieros $1,000,000 plus costs, jointly and 3
severally. 4
On appeal, the NAC affirmed the hearing panel’s decision in 5
its entirety. John Fiero, Nat’l Adjudicatory Council No. 6
CAF980002, 2002 WL 31476976, at *34 (Oct. 28, 2002). The Fieros 7
did not appeal the NAC’s decision to the SEC. 8
c) State Court Proceedings 9
After the Fieros refused to pay the fine, FINRA commenced an 10
action on December 22, 2003, in New York Supreme Court. Fin. 11
Indus. Regulatory Auth., Inc. v. Fiero, 882 N.E.2d 879, 880-81 12
(N.Y. 2008). On September 12, 2005, the Supreme Court concluded 13
that "NASD’s claim [was] firmly based on ordinary principles of 14
contract law" because the Fieros had "expressly agreed to comply 15
with all NASD rules, including the imposition of fines and 16
sanctions" when they voluntarily executed the NASD registration 17
forms. Nat’l Ass'n of Sec. Dealers, Inc. v. Fiero, 2005 N.Y. 18
Slip Op. 30161 [U], at 2, 2005 WL 6012105 (Sept. 12, 2005). The 19
Supreme Court further stated that "New York state courts have 20
long recognized the right of a private membership organization to 21
impose fines on its members, when authorized to do so by statute, 22
charter or by-laws," and that "NASD is not ‘just a private club,' 23
but a self-regulatory organization, federally-mandated under . . 24
. the Exchange Act to discipline its members and enforce the 25

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3 Even prior to the Court of Appeals' ruling, the Fieros had brought an
action in the Southern District, which has been voluntarily dismissed without
prejudice pursuant to Fed. R. Civ. P. 41(a).
6
federal securities laws as well as its own SEC-approved rules." 1
Id. at 4-5. On May 11, 2006, the Supreme Court awarded the NASD 2
a judgment of $1,329,724.54. Nat’l Ass'n of Sec. Dealers, Inc. 3
v. Fiero, 2006 N.Y. Slip Op. 30302 [U], 2006 WL 5251396 (May 11, 4
2006). 5
The First Department of the New York Appellate Division 6
affirmed the Supreme Court’s decision. Nat’l Ass’n of Sec. 7
Dealers, Inc. v. Fiero, 827 N.Y.S.2d 4, 5 (1st Dep’t 2006). The 8
New York Court of Appeals granted the Fieros leave to appeal, and 9
on February 7, 2008, reversed on the ground that the state courts 10
lacked subject matter jurisdiction. Fiero, 882 N.E.2d at 881-82. 11
The court explained that the FINRA complaint constituted an 12
action to enforce a liability or duty created under the Exchange 13
Act, and therefore, fell within the exclusive jurisdiction of the 14
federal courts pursuant to 15 U.S.C. § 78aa. Id. at 882. 15
d) Federal Court Proceedings 16
On February 8, 2008, the day after the New York Court of 17
Appeals issued its ruling, the Fieros filed the instant action 18
seeking a declaratory judgment that, inter alia, FINRA has no 19
authority to collect fines through judicial proceedings. 3 FINRA 20
thereafter filed a counterclaim, seeking to enforce the fine 21
under a breach of contract theory. Both parties moved to dismiss 22

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4 However, the court's order did not specify the amount of the judgment.
On April 2, 2009, the district court issued a more detailed decision and
order, setting forth its findings, reasoning, and conclusions as to the
earlier judgment, but similar to its earlier order, this decision did not
specifically direct entry of a judgment for a specific amount of money. Fiero
v. Fin. Indus. Regulatory Auth., Inc., 606 F. Supp. 2d 500 (S.D.N.Y. 2009).
The Fieros and FINRA both timely filed their notices of appeal on April 14,
2009 and April 29, 2009, respectively.
On April 17, 2009, the district court requested a limited remand to
correct the omission of the judgment amount. On July 15, 2009, we granted the
district court's request, and, thereafter the district court directed the
clerk to enter a judgment in favor of FINRA in the amount of $1,010,809.25
with costs and interest. Both parties made timely requests to reinstate the
appeals, which we granted on August 12, 2009.
5 Although both parties had agreed that federal jurisdiction existed,
the district court sua sponte decided that it lacked federal question
jurisdiction under 28 U.S.C. § 1331, but had diversity jurisdiction under 28
U.S.C. § 1332. Fiero, 606 F. Supp. 2d at 509. We disagree with the district
court’s conclusion that it lacked federal question jurisdiction.
For jurisdiction to arise under Section 1331, “the claim as stated in
the complaint” must “arise[] under the Constitution or laws of the United
States.” S. New England Tel. Co. v. Global NAPs Inc., 624 F.3d 123, 132 (2d
Cir. 2010) (quoting Carlson v. Principal Fin. Grp., 320 F.3d 301, 306 (2d Cir.
2003) (internal quotation mark omitted)). The Fieros seek a declaratory
judgment under 28 U.S.C. § 2201, “that FINRA has no authority to obtain a
money judgment based on” a disciplinary fine imposed pursuant to FINRA’s
powers under the Exchange Act. See Compl. ¶¶ 1, 16, and 30. On its face, the
complaint states a claim under the Exchange Act. We have federal question
jurisdiction to determine whether FINRA has authority to collect through
7
the complaint and counterclaim, respectively. 1
On March 30, 2009, the district court granted FINRA's motion 2
to dismiss the Fieros' claim, denied the Fieros' motion to 3
dismiss FINRA's counterclaim, and instructed the clerk to enter 4
judgment in favor of FINRA. 4
5
DISCUSSION 6
We review a district court’s grant of a motion to dismiss de 7
novo. Chase Grp. Alliance v. City of N.Y. Dep’t of Fin., 620 8
F.3d 146, 150 (2d Cir. 2010). Our review of a district court’s 9
legal conclusions, including the interpretation of a federal 10
statute, is also de novo. United States v. Fuller, 627 F.3d 499, 11
503 (2d Cir. 2010). 5
12

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judicial proceedings fines levied pursuant to the Exchange Act. See Franchise
Tax Bd. v. Constr. Laborers Vacation Trust, 463 U.S. 1, 19 n.19 (1983)
(explaining that federal question jurisdiction exists over a declaratory
judgment action if, inter alia, the defendant could have brought a coercive
claim under federal law against the plaintiff); see also Carlson, 320 F.3d at
307 (holding that the district court has subject matter jurisdiction because
it “is clear that the complaint, on its face, seeks relief under ERISA”).
8
The Fieros argue that while the Exchange Act and FINRA’s 1
rules and bylaws authorize FINRA to impose sanctions on its 2
members, it has no authority to bring judicial actions to collect 3
monetary sanctions. FINRA argues that it has this authority 4
under the Exchange Act and from a FINRA rule submitted to, and 5
not disapproved by, the SEC in 1990 (“1990 Rule Change”). See 6
Notice of Filing and Immediate Effectiveness of Proposed Rule 7
Change by NASD Relating to the Collection of Fines and Costs in 8
Disciplinary Proceedings, Exchange Act SEC Release No. 28227, 46 9
S.E.C. Docket 1049 (July 18, 1990) (hereinafter “SEC Notice of 10
1990 Rule Change”). We discuss each argument seriatim. 11
a) FINRA’s Authority Under the Exchange Act 12
13 The first question is whether the Exchange Act provides 14
FINRA with the necessary authority. We hold that it does not. 15
Under Section 15A(b) of the Exchange Act, SRO’s have a 16
statutory authority and obligation to “appropriately 17
discipline[]” their members for violation of any provision of the 18
Exchange Act, the rules or regulations promulgated thereunder, or 19
their own rules, “by expulsion, suspension, limitation of 20
activities, functions, and operations, fine, censure, being 21
suspended or barred from being associated with a member, or any 22

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6 It is worth noting that the power granted to SRO’s by Section 15A of
the Exchange Act to discipline their members applies to all SRO’s, and not
just FINRA.
9
other fitting sanction.” 15 U.S.C. § 78o-3(b)(7). However, 1
there is no express statutory authority for SRO’s to bring 2
judicial actions to enforce the collection of fines. 6
3
In the present context the omission is not insignificant. 4
The core issue, of course, is congressional intent, Touche Ross & 5
Co. v. Redington, 442 U.S. 560, 568 (1979), and, in the 6
discussion that follows, we explain why we believe that Congress 7
did not intend to empower FINRA to bring judicial actions to 8
enforce its fines. 9
The statutory scheme carefully particularizes an array of 10
available remedies, including permissible actions in the federal 11
courts. These include, of course, a variety of actions by 12
private parties for damages. 15 U.S.C. §§ 77k-77l, 78i(f), 13
78t(b); see Redington, 442 U.S. at 571-72 (discussing generally 14
private rights of action in the Securities Exchange Act). 15
Also, Section 21(d) of the Exchange Act provides express 16
statutory authority for the SEC to seek judicial enforcement of 17
penalties. See 15 U.S.C. § 78u(d). More specifically, the SEC 18
“may in its discretion bring an action” to enjoin any person who 19
“is engaged or is about to engage in acts or practices 20
constituting a violation” of, inter alia, any provision of the 21
Exchange Act, the rules or regulations thereunder, or the rules 22

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7 The SEC takes the position that it has the authority to bring an
action in a federal district court to enforce any order it issues that affirms
sanctions, including fines, imposed by FINRA. See Delegation of Authority to
the Office of the General Counsel, SEC Release No. 42,488, 71 S.E.C. Docket
10
of a national securities exchange or registered securities 1
association of which such person is a member from such practices. 2
Id. § 78u(d)(1). Moreover, the SEC has explicit authority to 3
seek monetary penalties for violations of the Exchange Act, the 4
rules and regulations promulgated thereunder, or for the 5
violation of a cease and desist order. Id. § 78u(d)(3)(A). 6
Under Section 21(e) of the Exchange Act, the SEC may also seek 7
“writs of mandamus, injunctions, and orders” from the federal 8
courts commanding any person to comply with, inter alia, “the 9
provisions of [the Exchange Act], the rules, regulations, and 10
orders thereunder, the rules of a national securities exchange or 11
registered securities association of which such person is a 12
member or person associated with a member . . . .” Id. § 78u(e). 13
Under Section 21(f), however, the SEC is prohibited from bringing 14
“any action pursuant to subsection (d) or (e) of this section 15
against any person for violation of, or to command compliance 16
with, the rules of a self-regulatory organization . . . unless it 17
appears to the Commission that (1) such self-regulatory 18
organization . . . is unable or unwilling to take appropriate 19
action against such person in the public interest and for the 20
protection of investors, or (2) such action is otherwise 21
necessary or appropriate in the public interest or for the 22
protection of investors.” Id. § 78u(f). 7
23

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1910 (March 2, 2000); 15 U.S.C. § 78u(e)(1). Although several other Courts of
Appeals have affirmed the SEC’s authority to enforce FINRA-imposed sanctions
pursuant to Section 21(e), see, e.g., SEC v. Mohn, 465 F.3d 647, 651-52 (6th
Cir. 2006); SEC v. McCarthy, 322 F.3d 650, 655 (9th Cir. 2003); SEC v. Vittor,
323 F.3d 930 (11th Cir. 2003); and Lang v. French, 154 F.3d 217, 222 (5th Cir.
1998), this issue is not before us on this appeal.
11
Therefore, when Congress passed the Exchange Act, and to 1
this date, Sarbanes-Oxley Act of 2002, § 3(b), (amending 15 2
U.S.C. § 78u); Dodd-Frank Wall Street Reform Act, Pub. L. No. 3
111-203, § 929P, 124 Stat. 1376, 1862-63 (2010) (amending 15 4
U.S.C. § 78u), it was well aware of how to grant an agency access 5
to the courts to seek judicial enforcement of specific sanctions, 6
including monetary penalties. 15 U.S.C. § 78u(d)(3)(A); see, 7
e.g., SEC v. Rosenthal, Nos. 10-1204-cv(L); 10-1253 (con.), 2011 8
WL 2271743 (2d Cir. June 9, 2011); SEC v. Tx. Gulf Sulphur Co., 9
446 F.2d 1301, 1307 (2d Cir. 1971). 10
In contrast, there are no explicit provisions in the statute 11
authorizing SRO’s to seek judicial enforcement of the variety of 12
sanctions they can impose. This is significant evidence that 13
Congress did not intend to authorize FINRA to seek judicial 14
enforcement to collect its disciplinary fines. Redington, 442 15
U.S. at 571-72 (not implying a private right of action where 16
elsewhere in the Exchange Act Congress demonstrated the ability 17
and explicit intent to create private rights of action). 18
We need not rely upon negative implications alone, however, 19
because there are statutory provisions that weigh heavily against 20
FINRA’s claim of enforcement powers through court actions 21
alleging breach of contract. First, FINRA’s sanctions are 22

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8 One court has even held that NASD is not an “aggrieved person” in a
Court of Appeals review proceeding, and that NASD was thus unable to bring a
petition for review of an SEC decision vacating an NASD disciplinary decision.
Nat’l Ass’n of Sec. Dealers, Inc. v. SEC, 431 F.3d 803, 809-10 (D.C. Cir.
2005).
12
appealable by an aggrieved party to the SEC and thereafter to the 1
United States Courts of Appeals. Had Congress intended judicial 2
enforcement, it would surely have provided for some specific 3
relief other than leaving SRO’s to commonlaw proceedings in state 4
courts or in federal district courts under diversity 5
jurisdiction. 8 Second, where FINRA enforces statutory or 6
administrative rules, or enforces its own rules promulgated 7
pursuant to statutory or administrative authority, it is 8
exercising the powers granted to it under the Exchange Act. 9
Indeed, FINRA’s powers in that regard are subject to divestment 10
by the SEC under Section 19(g)(2) of that Act. However, Congress 11
gave the federal courts exclusive jurisdiction to enforce the 12
Exchange Act, 15 U.S.C. § 78aa, and FINRA’s breach of contract 13
theory undermines that provision. FINRA contract enforcement 14
actions may bristle with Exchange Act legal issues because the 15
most serious fines levied by FINRA will be for member violations 16
of the Act. For example, the Fieros were charged with a 17
violation of Section 10(b) of that Act. State court enforcement 18
of FINRA fines might well, therefore, entail interpretation of 19
the Exchange Act notwithstanding the exclusive jurisdiction of 20
the federal courts. 21
One might argue that an inference of congressional intent to 22

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13
authorize such legal actions by FINRA can be drawn from the 1
seemingly inexplicable nature of a gap in the FINRA enforcement 2
scheme: fines may be levied but not collected. However, the gap 3
does not support an inference of inadvertent omission because 4
significant underenforcement of the securities laws and FINRA 5
rules is hardly the inevitable result of FINRA’s inability to 6
bring fine-enforcement actions. FINRA fines are already enforced 7
by a draconian sanction not involving court action. One cannot 8
deal in securities with the public without being a member of 9
FINRA. When a member fails to pay a fine levied by FINRA, FINRA 10
can revoke the member’s registration, resulting in exclusion from 11
the industry. Moreover, where a fine is based on a violation of 12
the Exchange Act, the violator will also face a panoply of 13
private and SEC remedies. See, e.g., 15 U.S.C. §§ 77k-77l, 78i, 14
78j(b). 15
Finally, our conclusion is amply supported by NASD’s 16
longstanding practices. It has always relied exclusively upon 17
its powers to revoke the registration of or deny reentry into the 18
industry to punish members who do not comply with sanctions. 19
U.S. Gen. Accounting Office, SEC and CFTC: Most Fines Collected, 20
But Improvements Needed in the Use of Treasury’s Collection 21
Service 11 (2001). So far as we can tell, it was not until 1990 22
that the NASD sought to enforce fines or any other sanction 23
through judicial actions in its own right. NASD (or any other 24
SRO) may never even have claimed to have the power to do so until 25

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14
1990. In that year, as discussed infra, NASD proposed a rule and 1
successfully asked the SEC not to disapprove it. The rule 2
notified the public of a new NASD policy of bringing court 3
actions in its name to collect fines. NASD, Notice to Members 4
90-21, available at 5
http://www.finra.org/Industry/Regulation/Notices/Pre-1996/. This 6
rule, and its effect, are discussed in the next subsection. And, 7
even after the change in policy in 1990 -- the effect of which 8
turns in part on the question of statutory authority -- the 9
action against the Fieros is said to be the first case brought 10
under that policy. Appellant’s Br. at 10. 11
Such a longstanding practice supports an inference that NASD 12
believed that it lacked judicial enforcement power. As the 13
Supreme Court has stated, 14
Authority actually granted by Congress of 15 course cannot evaporate through lack of 16 administrative exercise. But just as 17 established practice may shed light on the 18 extent of power conveyed by general statutory 19 language, so the want of assertion of power 20 by those who presumably would be alert to 21 exercise it, is equally significant in 22 determining whether such power was actually 23 conferred. 24
Fed. Trade Comm'n v. Bunte Bros., 312 U.S. 349, 352 (1941); see 25
also Bankamerica Corp. v. United States, 462 U.S. 122, 131 (1983) 26
(finding that “the Government's failure for over 60 years to 27
exercise the power it now claims . . . strongly suggests that it 28
did not read the statute as granting such power”). 29
Moreover, NASD’s longstanding reliance upon these other 30

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15
substantial enforcement methods was known to Congress, and 1
Congress left that reliance unaltered. This lack of action 2
further indicates that FINRA is not authorized to enforce the 3
collection of its fines through the courts. See Merrill Lynch, 4
Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353, 381-82 5
(1982) (noting that “an implied cause of action under the 6
[Commodities Exchange Act] was a part of the ‘contemporary legal 7
context’ in which Congress legislated,” and that “[i]n that 8
context, the fact that a comprehensive reexamination and 9
significant amendment of the [Commodities Exchange Act] left 10
intact the statutory provisions under which the federal courts 11
had implied a cause of action is itself evidence that Congress 12
affirmatively intended to preserve that remedy” (internal 13
citations omitted)). The situation here is different from 14
Merrill Lynch in that a failure to bring actions, rather than the 15
bringing of actions, was involved, but the principle of 16
congressional acquiescence is the same. 17
In sum, the issue is one of legislative intent, and we 18
conclude that the heavy weight of evidence suggests that Congress 19
did not intend to empower FINRA to bring court proceedings to 20
enforce its fines. 21
b) FINRA’s Authority Under the 1990 Rule 22
23 On April 10, 1990, and as amended on June 20, 1990, FINRA 24
filed a rule with the SEC pursuant to Section 19(b)(1) of the 25
Exchange Act. Self-Regulatory Organizations; Notice of Filing 26

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16
and Immediate Effectiveness of Proposed Rule Change by National 1
Association of Securities Dealers, Inc. Relating to the 2
Collection of Fines and Costs in Disciplinary Proceedings, 3
Exchange Act Release No. 28227, 46 SEC Docket 1049 (July 18, 4
1990), 1990 WL 320480. The proposal provided notification that 5
the NASD “intends to pursue other available means for the 6
collection of fines and costs imposed . . . in disciplinary 7
decisions” on or after July 1, 1990. Id. at *1. The NASD 8
advised that should “its own internal efforts for the collection 9
of fines . . . fail,” it may refer a matter “to external 10
collection agencies and in appropriate situations, . . . seek to 11
reduce such fines to a judgment.” Id. at *1 n.2. Along with its 12
SEC filing, the NASD issued a notice to its members in April 13
1990, informing them of its new policy and outlining how the 14
policy would be implemented. See NASD, Notice to Members 90-21, 15
available at 16
http://www.finra.org/Industry/Regulation/Notices/Pre-1996/. The 17
notice became effective on July 1, 1990. Id. (noting that the 18
“NASD will not pursue the collection of fines and costs assessed 19
in cases concluded prior to July 1, 1990”). 20
In October 1999, NASD sent a second notice to its members 21
notifying them that it would “pursue the collection of any fine 22
in sales practice cases, even if an individual is barred, if 23
. . . there has been widespread, significant, and identifiable 24
customer harm; or the respondent has retained substantial 25

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9 This second notice to members was issued after the NASD enforcement
action against the Fieros was initiated, but before the Fieros chose not to
pursue an appeal to the SEC.
10 We of course intimate no opinion on the validity of a properly
promulgated rule authorizing fine collection through judicial proceedings.
17
ill-gotten gains.” 9 NASD, Notice to Members 99-86, available at 1
http://www.finra.org/Industry/Regulation/Notices/1999/p004067. 2
FINRA claims that the 1990 Rule Change constitutes authority 3
for judicial enforcement of its fines. This claim is something 4
of an exaggeration. The 1990 Rule Change does not even purport 5
to be newly granted authorization from the SEC to FINRA to bring 6
such judicial actions. Rather, it appears to assume a pre- 7
existing power and to serve only as a notice of a new policy 8
under that power. 9
Having found no such pre-existing power, we may nevertheless 10
assume for purposes of analysis that the 1990 Rule Change, if 11
properly obtained, constitutes such authorization. 10 However, 12
for FINRA to have obtained authority under the 1990 Rule Change 13
to enforce the collection of its disciplinary fines through 14
judicial proceedings, the rule must have been properly 15
promulgated under the procedures established by the Exchange Act. 16
It was not. 17
Section 19(b) of the Exchange Act establishes the mechanism 18
by which SRO’s can change their governing rules. See 15 U.S.C. § 19
78s(b). To initiate the process, an SRO must file any proposed 20
rule change with the SEC, “accompanied by a concise general 21

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11 Congress’s intention in adopting § 19(b)(1) was to impose on SRO’s
“the same standards of policy justification that the Administrative Procedure
Act imposes on the SEC.” S. REP. No. 94-75 (1975), reprinted in 1975
U.S.C.C.A.N. 179, 207-08, 1975 WL 12347, at *29.
18
statement of the basis and purpose of such proposed rule change.” 1
Id. § 78s(b)(1). 11 The SEC is then required to publish notice of 2
the proposed rule change and give interested individuals an 3
opportunity to comment prior to either approving or disapproving 4
the rule. Id. 5
Under this system, established by Congress in 1975, all new 6
substantive rules and modification of existing rules for SRO’s 7
must go through a notice and comment period and obtain SEC 8
approval before becoming effective. Securities Acts Amendments 9
of 1975, Pub. L. No. 94-29, 89 Stat. 97 (codified as amended at 10
15 U.S.C. §§ 78a to 80b-4 (1975)); Credit Suisse First Boston 11
Corp. v. Grunwald, 400 F.3d 1119, 1130 (9th Cir. 2005). A 12
substantive rule -- or legislative one, as it is sometimes called 13
in this Circuit -- creates “new law, right, or duties, in what 14
amounts to a legislative act.” N.Y. State Elec. & Gas Corp. v. 15
Saranac Power Partners, L.P., 267 F.3d 128, 131 (2d Cir. 2001) 16
(citations and internal quotation mark omitted) (defining 17
substantive rule in the context of the Administrative Procedure 18
Act). 19
Congress also included an exception to the comment and 20
notice requirement of § 19(b)(1) for “‘House-Keeping’ rules and 21
other rules which do not substantially affect the public interest 22

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19
or the protection of investors.” 121 Cong. Rec. 700-183 (1975) 1
(comments of Sen. Harrison Williams); see also Saranac Power 2
Partners, 267 F.3d at 131 (defining interpretive rules as those 3
which “do not create rights, but merely clarify an existing 4
statute or regulation” (citations and internal quotation marks 5
omitted)); Grunwald, 400 F.3d at 1130 n.11. Such proposed rule 6
changes take immediate effect upon filing with the SEC. 15 7
U.S.C. § 78s(b)(3)(A). In particular, the rule change becomes 8
effective on filing with the SEC if the SRO designates the 9
proposed rule as: 10
(i) constituting a stated policy, practice, 11 or interpretation with respect to the 12 meaning, administration, or enforcement of an 13 existing rule of the self-regulatory 14 organization, (ii) establishing or changing a 15 due, fee, or other charge imposed by the 16 self-regulatory organization on any person, 17 whether or not the person is a member of the 18 self-regulatory organization, or (iii) 19 concerned solely with the administration of 20 the self-regulatory organization or other 21 matters which the Commission [may specify]. 22
23 Id. 24
25 In proposing the 1990 Rule Change, the NASD designated it as 26
such a “House-Keeping” rule, “one constituting a stated policy 27
with respect to the enforcement of an existing rule of the NASD 28
under § 19(b)(3)(A)(i) of the [Exchange] Act.” See Self- 29
Regulatory Organizations; Notice of Filing and Immediate 30
Effectiveness of Proposed Rule Change by National Association of 31
Securities Dealers, Inc. Relating to the Collection of Fines and 32
Costs in Disciplinary Proceedings, Exchange Act Release No. 33

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20
28227, 46 SEC Docket 1049 at *1, 1990 WL 320480. Thus, the rule 1
was to become effective upon the SEC’s receipt of the filing. 15 2
U.S.C. § 78s(b)(3)(A). 3
We, however, are not bound by the NASD’s characterization as 4
to whether the 1990 Rule Change affected the substantive rights 5
of members. Brodsky v. U.S. Nuclear Regulatory Comm'n, 578 F.3d 6
175, 182 (2d Cir. 2009) ("’The particular label placed upon [an 7
order] by [an agency] is not necessarily conclusive, for it is 8
the substance of what the [agency] has purported to do and has 9
done which is decisive.’" (quoting Columbia Broad. Sys., Inc. v. 10
United States, 316 U.S. 407, 416 (1942))). 11
Prior to the 1990 Rule Change, as discussed, there was no 12
existing SEC rule or statute that authorized the NASD to initiate 13
judicial proceedings to enforce the collection of its 14
disciplinary fines. Furthermore, the NASD had a longstanding 15
practice of not seeking to enforce collection through judicial 16
actions. Indeed, even subsequent to the 1990 Rule Change, NASD 17
did not rely on it to ask courts to enter judgments based on its 18
disciplinary fines. For example, in 1998, it sought the SEC’s 19
assistance in obtaining court orders to direct violators owing 20
NASD fines to pay these amounts. See U.S. Gen. Accounting 21
Office, SEC and CFTC: Most Fines Collected, But Improvements 22
Needed in the Use of Treasury’s Collection Service 11 (2001). In 23
response, the SEC agreed to seek court orders under Exchange Act 24
§ 21(e)(1) to enforce the NASD’s disciplinary fines, but only for 25

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cases that it affirmed on appeal and that met other specific 1
requirements. Id. 2
This background and the various statutory provisions 3
discussed above demonstrate that the 1990 Rule Change was not 4
simply a stated policy change under 15 U.S.C. § 78s(b)(3)(A) that 5
could bypass the required notice and comment period of Section 6
19(b). Rather, it was a new substantive rule that affected the 7
rights of barred and suspended members to stay out of the 8
industry and not pay the fines imposed on them in prior 9
disciplinary proceedings. As a result, the NASD was required to 10
file the new substantive rule with the SEC under 15 U.S.C. § 11
78s(b)(1) for publication of a notice and comment period. 12
Because the NASD improperly designated the 1990 Rule Change, it 13
was never properly promulgated and cannot authorize FINRA to 14
judicially enforce the collection of its disciplinary fines. 15
CONCLUSION 16
For the foregoing reasons, we reverse the judgment 17
dismissing the appellants’ declaratory judgment complaint and 18
vacate the judgment entered in favor of the appellee. 19
20

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