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Wilbanks Securities, Inc. v. Financial Industry Regulatory Authority Finra

United States District Court, W.D. Oklahoma

May 10, 2017

Wilbanks Securities, Inc., Plaintiff,
v.
FINANCIAL INDUSTRY REGULATORY AUTHORITY FINRA, SECURITIES AND EXCHANGE COMMISSION SEC, and RBC CORRESPONDENT SERVICES, Defendants.

          ORDER

          DAVID L.RUSSELL UNITED STATES DISTRICT JUDGE.

         Before the Court is Plaintiff Wilbanks Securities, Inc.'s Emergency Motion for a Temporary Restraining Order. Docs. 11 & 14. Defendants Financial Industry Regulatory Authority (FINRA) and Securities and Exchange Commission (SEC) have responded. Docs. 16 & 17.[1] Having considered the parties' arguments and submissions, and for the reasons set forth below, the Court denies Plaintiff's application for a temporary restraining order due to the lack of subject matter jurisdiction.

         I. Background

         Wilbanks Securities, Inc. is a securities broker-dealer headquartered in Oklahoma City. Doc. 11. It argues in this action that its regulating authority, FINRA, is unfairly applying one if its rules and that, should it continue to do so, Wilbanks will collapse. FINRA is the self-regulatory organization (SRO) responsible for enforcing compliance by its members with the Securities Exchange Act, with authority delegated by the Securities and Exchange Commission (SEC). See Karsner v. Lothian, 532 F.3d 876, 880 (D.C. Cir. 2008); 15 U.S.C. § 780-3(b)(7). Because Wilbanks Securities is a member of FINRA, it is subject to its rules and regulations, as well as those of the Securities Exchange Act and the SEC.

         Wilbanks's present troubles began when an arbitration panel rendered a $1, 073, 000 award against it on April 13, 2017. See Doc. 11, Ex. 1, Arbitration Award in FINRA Case No. 16-00226, Huitt v. Wilbanks Securities, Inc.[2] A few days later, on April 18, 2017, FINRA notified Wilbanks that it had learned of the adverse arbitration award and that this placed Wilbanks in violation of the Net Capital Rule, an SEC regulation that requires every securities broker to maintain a certain amount of net capital at all times. 17 C.F.R. § 240.15c3-1.

         FINRA ordered Wilbanks to immediately book the adverse award as a liability. Doc. 11, Ex. 3. This type of book-keeping is not new practice: in a September 2000 notice to brokers, the SEC explained that the Net Capital Rule required firms subject to adverse awards to book the award as a liability despite that the appeal process had not been exhausted and no judgment had been entered. The SEC's rationale for requiring the immediate booking of the award was that “grounds for revision on appeal are very limited.” See NASD Notice to Members 00-63, Doc. 1, Ex. 15.

         Because the award was an immediate liability, FINRA informed Wilbanks that, per FINRA Rule 4110(b)(1), it must suspend all business operations until it was in compliance with the Net Capital Rule. Further, Securities and Exchange Act Rules 17a-11(b) and (g) required Wilbanks to periodically notify the SEC and FINRA of its Net Capital deficiency. Doc. 11, Ex. 3. Wilbanks's clearinghouse, RBC Correspondent Services, then informed it that Wilbanks's net capital deficiency meant RBC would restrict its ability to trade. Doc. 11, Ex. D. Wilbanks was thus more or less barred from conducting further business.

         Wilbanks responded quickly to stave off closure. On April 20, 2017, it moved to vacate the $1.07 million arbitration award in the U.S. District Court for the District of Colorado. See Doc. 11, Ex. 5, Huitt v. Wilbanks Securities, Inc., No. 17-cv-00919-STV. In short, Wilbanks believes substantive unfairness and procedural irregularities plagued the arbitration proceedings. The District Court for the District of Colorado is presently considering the validity of those awards and those issues are not before this Court.

         What is before this Court is Wilbanks's application for a temporary restraining order requiring FINRA and the SEC to retract the Notice of Net Capital Deficiency, which would permit Wilbanks to stay in business until the District Court in Colorado rules on its motions to vacate. In effect, Wilbanks asks that this Court excuse it from complying with SEC's Net Capital Rule, at least until a hearing on a preliminary injunction can be heard. Wilbanks believes that without the TRO, its seventy-five broker-employees will be out of work, clients will be unable to access their accounts, and Wilbanks Securities will effectively be put out of business-all of which it contends would result in a deprivation of due process under the Fifth Amendment. Wilbanks's specific argument appears to be that FINRA Rule 12904(j), which mandates that a firm who has suffered an adverse arbitration award must pay the award with 30 days unless it files a motion to vacate, excuses it from the SEC's own interpretation of its Net Capital Rule that requires it to immediately book the award as a liability. Whatever the merits of that argument, [3] the Court is powerless to grant relief because it lacks subject matter jurisdiction over the present action.

         II. Discussion

         As an initial matter, it is not clear that Wilbanks may assert any action against the SEC: sovereign immunity shields the United States, its agencies, and its employees from suit, absent a waiver. Fed. Deposit Ins. Corp. v. Meyer, 510 U.S. 471, 475, 114 S.Ct. 996 (1994). Consequently, the SEC is specifically immune from suit except in certain well-defined circumstances. SEC v. Independence Drilling Corp., 595 F.2d 1006, 1008 (5th Cir. 1979); 15 U.S.C. §§ 77v(a), 78aa. Those circumstances consist of areas in which Congress has expressly waived sovereign immunity. United States v. Dalm, 494 U.S. 596, 608, 110 S.Ct. 1361 (1990). So absent this waiver, the Court lacks subject matter jurisdiction to adjudicate claims against the United States and its agencies, including the SEC. United States v. Mitchell, 463 U.S. 206, 212, 103 S.Ct. 2961 (1983). Further, it is plaintiff's burden to establish this waiver. See James v. United States, 970 F.2d 750, 753 (10th Cir. 1992).

         Wilbanks, though, has not met this burden. In fact, it has not pointed to any waiver of sovereign immunity that would allow it to sue the SEC. In oral proceedings before the Court on May 5, 2017, Wilbanks seemed to suggest that the Declaratory Judgment Act may confer jurisdiction. Yet it is well-established that this Act cannot serve as an independent basis for jurisdiction, see Skelly Oil Corp. v. Phillips Petroleum Co., 339 U.S. 667, 671, 70 S.Ct. 876 (1950), and does not “operate as an express waiver of sovereign immunity.” Worsham v. U.S. Dep't of the Treasury, 2013 WL 5274358, at *7 (D. Md. Sept. 17, 2013). In short, the Act “neither provides nor denies a jurisdictional basis for actions under federal law.” Id.

         But in any event, all of Wilbanks's claims, including those against FINRA, suffer from another jurisdictional defect: Wilbanks has failed to first seek relief under the Exchange Act's exclusive review scheme.

         The Exchange Act creates a comprehensive, multi-tiered scheme for reviewing FINRA regulatory actions. See, e.g., Swirsky v. NASD, 124 F.3d 59, 61 (1st Cir. 1997); see First Jersey Sec., Inc. v. Bergen, 605 F.2d 690, 696 (3d Cir. 1979), cert. denied, 444 U.S. 1074 (1980). Any proceeding in which FINRA issues a disciplinary sanction is subject to de novo review by the SEC, either upon application of the aggrieved party or on the Commission's own motion. 15 U.S.C. § 78s(d). The SEC then makes an independent determination as to liability, including whether FINRA's determination was in accordance with its rules and FINRA applied its rules in a manner consistent with the purposes of the Exchange Act. 15 U.S.C. § 78s(e)(1)(A). Under 15 U.S.C. § 78s(e)(1)(A) and (B), the SEC can affirm, set aside, or modify any sanction, or simply remand the case to FINRA for further proceedings. ...


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