The Messenger: A Regulatory Authority Turned One Man’s American Dream Into a Nightmare

December 09, 2023 | By ADAM GRIFFIN

Most everyone knows that the American system has three branches of government: Congress passes the laws, the president executes the laws, and the courts decide disputes about what the laws mean. But what happens when one entity exercises all three powers? Frank Black, a 40-year veteran of the securities industry, learned just how difficult life can be when a semi-private entity — the Financial Industry Regulatory Authority (FINRA) — came after him and his business, Southeast Investments, N.C., Inc.

Black, who lost his father at a young age, started working in the securities industry after putting himself through high school and college. In 1997, he started his own firm and, in time, was employing more than 100 people and serving thousands of clients. It seemed to be a true example of someone achieving the American Dream.

But then the administrative state stepped in.

Southeast Investments had one physical office and employed a number of remote workers, a practice that later became commonplace among businesses in response to the COVID-19 pandemic. Black says he made a point of traveling to visit his remote staff members, mostly to maintain strong working relationships with them but also to maintain oversight in a heavily regulated industry.

FINRA requires securities brokers to inspect their “branch offices” once every three years. But FINRA had never claimed that the “branch office” inspection rule applied to the homes of remote employees. Then, during a routine examination, FINRA asked for records of how Black supervised remote workers, which he provided. Black kept a calendar of his inspections, but FINRA demanded more, although the agency never alleged any harm occurred to investors.

FINRA is charged by the Securities and Exchange Commission with governing the securities industry. In practice, FINRA exercises all three of the government’s powers. It promulgates rules governing the industry (it legislates). It enforces those rules, and other laws and regulations (it executes). And it decides disputes arising under those laws, regulations and rules (it adjudicates). Effectively all professional securities brokers and dealers are required to register with FINRA and are subject to its authority.

FINRA investigated Black and Southeast Investments and determined that he had failed to comply with its branch office rule. It then initiated an in-house enforcement action against him and his company. Black argued he did not violate the rules but, unsurprisingly, FINRA ruled against him and in its own favor. FINRA fined Black and Southeast Investments $200,000 (later reduced to $146,500) and permanently banned Black from the securities profession.

Despite this blow to his career and reputation, Black fought back. With legal help from my firm, Pacific Legal Foundation, he is asking a federal court to void FINRA’s enforcement and adjudication of its own rules.

Black and Southeast are challenging FINRA’s structure as unconstitutional. Its officers exercise significant government powers but they are not appointed by the president or a department head, which violates the Constitution’s Appointments Clause. This renders FINRA unaccountable to the president and, therefore, to the American people.

Black and Southeast will challenge a quasi-governmental entity’s exercise of the government’s legislative, executive and judicial powers, arguing that this violates separation of powers, which divides the government’s authority to prevent arbitrary violations of individual liberty.

In the Federalist Papers, James Madison wrote: “The accumulation of all powers, legislative, executive, and judiciary, in the same hands … may justly be pronounced the very definition of tyranny.” FINRA concentrates all government’s powers in a semi-private corporation, making Black a victim of the very tyranny the Constitution’s architects warned against. That is why he’s asking a federal court to declare FINRA unconstitutional and restore his reputation and livelihood.

This op-ed was originally published in The Messenger on November 25, 2023.