Broker-Dealers Sue FINRA, Claim Enforcement Authority Is Unconstitutional
By Staff
Boustead Securities and Sutter Securities, both based in Irvine, Calif., along with Keith Charles Moore, former chief executive officer, filed suit against the Financial Industry Regulatory Authority on April 1, 2026, in the U.S. District Court for the District of Delaware. The case – Boustead Securities, LLC et al. v. Financial Industry Regulatory Authority, Inc. – takes aim at the structural foundation of FINRA’s in-house disciplinary system.
The lawsuit stems from a formal FINRA disciplinary complaint filed against the firms and Moore on Jan. 15, 2026 – a contested proceeding, not a settled matter. The complaint alleges that from 2021 to 2023, both firms failed to develop and implement a reasonably designed anti-money laundering program, failed to supervise their underwriting and syndication businesses, and violated books-and-records requirements. Moore, who served as CEO and AML compliance officer at both firms simultaneously, is named as a respondent. The allegations have not been adjudicated.
The firms participated as underwriters or selling group members in approximately 30 public securities offerings during the period in question – many involving small-cap, micro-cap, and nano-cap companies with primary operations in China. According to the complaint, the firms failed to detect or investigate red flags in those transactions, did not conduct order-level surveillance for potential market manipulation, and lacked supervisory systems designed to achieve compliance with Regulation M. FINRA further alleges that Boustead repeatedly misidentified the start date of required restricted periods under Regulation M, causing the firm’s own supervisory systems to exclude dates that fell within the applicable restricted period.
The complaint also alleges that Boustead willfully violated Exchange Act Section 17(a) and Rule 17a-4 by failing to capture and retain business-related communications conducted through WhatsApp and WeChat, despite management’s awareness that those platforms were being used for firm business – including discussions of wire transfers and IPO allocations. In one instance described in FINRA’s complaint, three unaffiliated individuals wired $5 million from the same Hong Kong bank to fund a single Chinese IPO; the firms allegedly received screenshots of WeChat conversations discussing those allocations but failed to preserve or review them. Additionally, FINRA alleges that Boustead failed to disclose approximately $1.25 million in underwriting compensation received in connection with a May 2021 initial public offering.
Sutter faces a separate set of allegations: the complaint states that the firm sold new issue securities to accounts in which restricted persons – immediate family members of Sutter representatives – held a beneficial interest, in violation of FINRA Rule 5130. The firm’s written supervisory procedures did not define what a restricted person was, and employees were not trained on the requirement.
According to the firms’ federal court filing, the consequences of FINRA going public with the complaint amounted to what the lawsuit describes as a “death spiral.” Within days, clearing firms, banks, and counterparties treated the proceeding as a significant or even disqualifying risk event. The firms allege that FINRA went further than the complaint itself – contacting Nasdaq before the enforcement action was even filed and instructing the exchange not to approve any IPOs where Boustead served as underwriter. FINRA also allegedly admitted to interfering with the firms’ limited membership applications to Nasdaq and the New York Stock Exchange. Issuers walked away from agreements. Sutter’s clearing firm moved to terminate its arrangement. Personal brokerage accounts belonging to Moore and Daniel McClory, another firm principal, were shut down by Dominari Securities, which the filing describes as saying it had “no choice.”
The federal lawsuit raises five constitutional claims. If FINRA is considered a private entity, the plaintiffs argue it has been handed government-level enforcement power without the constitutional oversight that authority requires – a violation of the private nondelegation doctrine. If FINRA is treated as a government actor, the plaintiffs contend it is violating the Appointments Clause, separation of powers, the Seventh Amendment right to a jury trial, and the Fifth Amendment right to due process.
The Seventh Amendment argument draws directly from the Supreme Court’s 2024 decision in SEC v. Jarkesy, in which the Court held that when the SEC seeks civil penalties in a fraud case, the Seventh Amendment entitles the respondent to a jury trial. The Boustead plaintiffs argue the same logic applies to FINRA proceedings. On due process, the complaint describes what it characterizes as a structurally biased system – one in which the adjudicator is selected, employed, and paid by the same organization that brings the case.
The lawsuit is among several pending challenges to FINRA’s constitutional authority in the federal courts. In Alpine Securities Corp. v. FINRA, the U.S. Court of Appeals for the D.C. Circuit found that Alpine Securities had shown a substantial likelihood of success on its argument that FINRA cannot expel a member without any SEC review of that decision – a likely violation of the private nondelegation doctrine. The Supreme Court denied certiorari in that case in June 2025, leaving the constitutional questions largely unresolved and the case pending in district court. The Sixth Circuit has also signaled that Seventh Amendment challenges to FINRA’s proceedings have “real force.”
The underlying FINRA complaint centers on IPO underwriting for foreign issuers, not on the distribution of retail alternative investment products. The constitutional challenge, however, is directly relevant to every broker-dealer in the securities industry. If courts ultimately require FINRA to obtain jury trials for enforcement proceedings that seek punitive civil penalties – or find that the agency cannot expel members without prior SEC review – the structure of broker-dealer regulation would shift materially. That includes the independent broker-dealers and registered investment advisers that distribute nontraded real estate investment trusts, business development companies, interval funds, and other alternative investment products to retail investors.
Boustead has a prior enforcement history with FINRA. In a November 2022 AWC, the firm paid a $35,000 fine and consented to findings that it failed to collect required customer and investment profile information in connection with private placement offerings from 2018 to 2020 and failed to timely file certain required corporate offering documents. The firm neither admitted nor denied those findings.
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