FINRA RULE NOT RETROACTIVE
In her remarks at PLI’s SEC Speaks, SEC Commissioner discussed the question of retroactivity as it might apply to various provisions of Dodd-Frank (here). There are of course a number of provisions in the Act which enhance the authority of SEC enforcement. Whether any or all of those provisions have retroactive effect will have to be resolved on a case by case basis.
The question of retroactivity was also considered recently by the Ninth Circuit Court of Appeals regarding a FINRA rule. Sacks v. SEC, No. 07-74647 (9th Cir. Filed Feb. 22, 2011). The rule involved governs who can appear as a representative in securities arbitrations. Specifically, in 2007 FINRA proposed a rule which would prohibit anyone barred from the securities industry from representing parties in securities arbitrations. The rule was approved after review by the Commission’s Division of Market Regulation.
Petitioner Richard Sachs initiated a proceeding in the Ninth Circuit challenging the rule. Mr. Sachs is not an attorney. He claims that since 1991 he has represented parties in over 1,300 arbitration claims, tired over 300 cases to decision and mediated another 250 or more to settlement. Mr. Sachs was barred from the securities industry over 16 years ago.
When the rule was under review by Market Regulation, Mr. Sacks submitted a comment letter in which he objected to the rule. Specifically, he claimed that the rule is impermissibly retroactive because it would constitute additional punishment for his prior acts. Market Regulation rejected this claim concluding that the rule was designed to prevent fraudulent and manipulative acts and practices and to promote just and equitable principles of trade and to protect investors. Mr. Sacks filed his petition without seeking review by the SEC.
The Ninth Circuit granted the petition. First, it rejected the SEC’s claim that Mr. Sachs had not exhausted his remedies since he bypassed the Commission. The court held that its jurisdiction arose from the special statutory process of 15 U.S.C. Section 78y which governs review of rules proposed by self-regulatory organizations. Under that Section the person aggrieved by the rule can petition either the D.C. Circuit or the circuit court for the district in which he or she resides.
Second, the court concluded that the rule is impermissibly retroactive in the case of Mr. Sachs. In considering his challenge the court began by noting that there is a presumption against retroactive legislation. Before applying a statute retroactively the court looks first to see if it expressly provides for retroactive effect. If not the question becomes whether the retroactive application of the provision would add “new legal consequences to events completed before its enactment.” (internal citations omitted).
Here Mr. Sachs was barred by the SEC from engaging in certain securities-related activities. The new FINRA if given retroactive effect would add to that sanction by precluding Mr. Sachs from appearing in any securities arbitration as the representative of a person. Under these circumstances the court held that the rule cannot have retroactive effect.