Loftus v. Financial Industry Regulatory Authority

Background

Robert Loftus sued the Financial Industry Regulatory Authority, Inc. (FINRA), a private corporation and self-regulatory organization registered with the Securities and Exchange Commission. Loftus alleged that FINRA violated the Securities Exchange Act of 1934 by refusing to provide a forum to seek removal of his disciplinary record.

FINRA had brought a disciplinary proceeding against Loftus based on allegations that, while employed by Wells Fargo, he deposited checks drawn on his personal checking account into his Wells Fargo brokerage account to benefit temporarily from the funds. In March 2017, Loftus agreed to a three-month suspension, a $5,000 fine, and findings that he had engaged in check kiting. The settlement stated that the order would become part of his permanent disciplinary record and be publicly disclosed. It also waived his right to appeal or otherwise challenge the order.

In 2020, Loftus filed a claim in FINRA’s arbitration forum seeking expungement of the disciplinary order. FINRA determined that the claim was not eligible for arbitration and closed the case. Loftus then asked the district court to order FINRA to expunge the record or, alternatively, to provide an expungement hearing. He disputed the characterization of his conduct as check kiting and alleged that the public record harmed his ability to conduct his trade.

Administrative exhaustion and jurisdiction

FINRA moved to dismiss under Federal Rule of Civil Procedure 12(b)(1), for lack of subject-matter jurisdiction, and Rule 12(b)(6), for failure to state a legally sufficient claim.

The court explained that the Exchange Act provides a comprehensive review process for FINRA disciplinary decisions. An aggrieved party must appeal to FINRA’s National Adjudicatory Council, then petition the Securities and Exchange Commission for review, and finally appeal to the appropriate federal court of appeals. The court treated this exhaustion requirement as mandatory and jurisdictional.

Loftus did not use that process. After agreeing to the 2017 disciplinary settlement, he did not challenge the order before FINRA’s National Adjudicatory Council, seek Securities and Exchange Commission review, or appeal to the United States Court of Appeals for the Second Circuit. Instead, he sought expungement through FINRA’s separate arbitration forum and then filed in the district court. The court held that it therefore lacked jurisdiction to review the disciplinary order or order its expungement.

No right to an expungement hearing

The court separately considered Loftus’s argument that he was not challenging the disciplinary order but was seeking only a hearing on expungement. The court held that this type of claim would be independent of the disciplinary merits and would not be subject to the exhaustion requirement, but concluded that Loftus had not shown any legal entitlement to such a hearing.

The court found no provision in the Exchange Act or FINRA’s rules creating a right to a hearing to expunge a FINRA-initiated enforcement action. The statute’s requirement that a self-regulatory organization provide a fair disciplinary procedure did not establish such a right. The court also explained that FINRA Rule 2080 applies to expungement of customer-initiated complaint information, not FINRA-initiated enforcement actions against a stockbroker.

The court further held that the Exchange Act does not provide a private right of action to challenge an exchange’s failure to follow its own rules. It also rejected Loftus’s attempt to base a hearing right on due process, explaining that FINRA is a private actor rather than a state actor.

Disposition

Judge Sidney H. Stein granted FINRA’s motion to dismiss and dismissed the complaint. The court relied on both its lack of subject-matter jurisdiction over Loftus’s challenge to the disciplinary record and its conclusion that Loftus had no right to an expungement hearing.