Exploring the Dynamics of Regulatory Adjudication

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Federal agencies often operate their own tribunals to process legal disputes. These administrative law courts (ALCs) enable agencies to review regulatory disputes between a private party and legal staff at the agency. By my count, there are roughly 42 entities that possess the power to adjudicate matters subject to rules and regulations under the Administrative Procedure Act. While public awareness is often limited to agency proceedings, there are several private organizations that also exercise adjudicatory oversight.

Self-regulatory organizations (SROs) function as both private nonprofit entities and governmental deputies. Congress authorizes select federal agencies to confer limited, quasi-governmental powers to SROs to facilitate their broader oversight responsibilities. Most SROs receive their powers from Congress and certain financial regulators, namely the Securities and Exchange Commission (SEC). These SROs serve as intermediaries between the SEC, their member firms. These are the 48 national securities exchanges that facilitate lawful stock trading, dominated by the big three: New York Stock Exchange, Nasdaq, and the Chicago Board Options Exchange. Self-regulation often allows industry-wide-members to avoid more inflexible government regulation. This allows firms to be governed first by private rules and protocols.

The focus of this commentary concerns what I term “specialized” SROs - entities that wield enforcement, quasi-legislative, and quasi-judicial (adjudicatory) powers. This differs from the 48 national securities exchanges that can only utilize enforcement and quasi-legislative power. The several specialized SROs that adjudicate disputes on behalf of federal agencies are the Financial Industry Regulatory Authority (FINRA), the Public Accounting Oversight Board (PCAOB), the Chicago Mercantile Exchange Group (CME Group), and the Horse Racing Safety and Integrity and Safety Authority (HISA).

Features of SRO Adjudication

SRO adjudication mirrors agency adjudication in several important ways. First, SROs are structurally linked to the federal agencies from which they derive power. SRO adjudication can be understood as a unique extension from their parent agency. This is most apparent with the connection between FINRA’s tribunal and the SEC’s own ALC, where appeals are resolved. To resolve its legal matters internally, FINRA provides in-house hearings to its members. FINRA’s hearings are managed by panels comprised of three hearing officers.

The CME Group refers to its adjudicatory proceedings as “arbitration” headed by “arbitrators” (the equivalent of an ALJ). Arbitrators manage various arbitration panels that oversee cases emerging from one of four national futures exchanges (NYMEX, CME, CBOT, and COMEX). The CME Group’s “mixed panel” is comprised of a co-chairman overseeing five Arbitration Committee members, three of whom are non-members unassociated with the contract market. Contract markets are regulated exchanges providing platforms for the trade of futures, options, swaps and other contracts.

If a party seeks to appeal a case beyond the mixed panel, the case may be sent to an appropriate appeals committee or “appellate panel” of the CME Group Board. This is a unique feature of the CME Group in that most agencies led by a panel or commission do not feature multiple appellate panels for their final adjudicative decisions. These appellate panels are occupied by “directors,” while the final stage of review is reserved to the CFTC’s commissioners, who occasionally accept appeals.

Like CME Group, HISA calls its judges “arbitrators.” What differs is that HISA’s first stage of review is not before an arbitrator. Rather, there must first be a vote by the “Authority” or HISA’s commissioners to impose charges against a private party, similar to what SEC commissioners do for greenlighting enforcement charges. If imposed, the litigant can appeal the decision to the arbitrator to either affirm or deny the charges. If appealed again, the case may go before the Federal Trade Commission’s (FTC’s) commissioners, who reserve the final say. Certain cases that aren’t challenged by the private party are resolved before the Horseracing Integrity and Welfare Unit, which is the same prosecutorial body that brings charges before the Authority.

Similar to how certain large agencies like the Department of Labor employ deputy chief ALJs or the National Labor Relations Board’s associate chief ALJs, FINRA employs a deputy chief hearing officer. This is unique because agencies typically only have at most one chief ALJ and a host of regular ALJs, as opposed to the deputy rank. Even the SEC, from which FINRA derives much of its authority, only oversees one chief and several regular ALJs at any given time.

FINRA is also unique in that it oversees two stages of multi-member legal review, where both its initial and final decisions are rendered by a panel of hearing officers, rather than one official. Most agency adjudication, by contrast, features only a single ALJ rendering decisions. Some agencies afford the opportunity for litigants to be heard before a panel of final adjudicators if the case is accepted on appeal. In FINRA’s case, the first stage of hearing panels is conducted through the Office of Hearing Officers (OHO). OHO, like the CME Group’s arbitration committees, is unique for using a pool of adjudicators from adjacent advisory committees outside of the Office of Hearings and Appeals. While certain federal agencies are capable of borrowing ALJs on an ad-hoc basis, they don’t typically borrow their own officials from other internal departments like FINRA does.

The PCAOB is considered both an informal federal agency and an SRO, because since the Supreme Court’s decision in Free Enterprise Fund v. PCAOB (2010), the president has been able to remove Board members without cause. The Supreme Court also held that PCAOB Board members must be appointed by SEC commissioners, unlike FINRA, CME Group, and HISA, which are more autonomous. This degree of agency control was recently demonstrated by SEC Chair Paul Atkins’s decision (likely in consultation with fellow commissioners) to dismiss former PCAOB Chair Erica Y. Williams.

The PCAOB is also the only SRO that can adjudicate enforcement actions brought against foreign actors, namely foreign accountants. The PCAOB’s broad jurisdiction under the Sarbanes-Oxley Act and its authorizing statute allows it to adjudicate accounting law violations against professionals and firms located  anywhere around the world so long as they do business in the US. PCAOB hearing officers can and do revoke the registration statuses of accounting firms found to have violated the law. However, the bulk of these decisions are reserved to the Board itself, since roughly 91% of its cases are resolved in settlement orders and never reach a hearing officer.

Another unique element of SRO adjudication is that virtually all these cases are reserved for members-only disputes. This means that if you are not FINRA registered, a registered accounting firm with the PCAOB, or a registered jockey with HISA, you are disallowed from pursuing adjudicatory disputes in their forums. The CME Group is the only SRO that divides its disciplinary proceedings between member-only and non-member controversies.

Table 1. 

Table based on author’s calculations. As the above table suggests, each of the four SROs win the overwhelming majority of their cases. These are comparable to the rates of success enjoyed by their parent agencies during the same period. See the following piece for more information. 

HISA adjudication is also club-only access, reserved for those who are horse-racing trainers and jockeys. This affords a degree of exclusivity in SRO legal matters, driven by membership-based legal processes. While there is some degree of overlap with agency legal processes, in that FINRA member broker-dealers must also register with the SEC before doing business, there are many financial professionals and firms that only need to register with the SEC.

SRO Connections to Agency Adjudication

Despite its differences, SRO adjudication is very much linked to agency adjudication. SRO tribunals afford similar stages of review and procedural steps that litigants can navigate akin to a federal ALC. Once a litigant has exhausted their options before the SRO’s final adjudicator, they can appeal their case to the overarching federal agency. This resembles a legal doctrine in administrative law that provides for judicial review of agency decisions after the private party has exhausted each stage of review within the agency ALC.

Both FINRA and PCAOB cases can be appealed to the five SEC commissioners once they’ve been reviewed by FINRA’s National Adjudicatory Council (NAC) and the PCAOB’s Board. This interconnected chain of review has fostered an added degree of cost and delay for some litigants capable of appealing their cases all the way up to the agency.

A notable example can be seen with Frank Black, who was adjudicating before FINRA for years prior to having his case heard before the SEC and now in federal court. FINRA originally targeted Black, a broker-dealer and owner of Southeast Investments, for failing to keep records of his visits to four of his offices where several staff members worked remotely. For this infraction, FINRA’s enforcement attorneys pursued a $243,000 fine and a lifetime bar from the securities industry against Black in its own tribunal.

Figure 1.

Source: Herskovits PLLC (The above graphic only covers FINRA’s OHO process and not an appeal to the NAC).

The case was first brought before FINRA’s OHO in 2015. FINRA’s OHO upheld the charges, prompting Black to appeal to the NAC, which in 2019 upheld the initial decision. Black subsequently appealed to SEC’s commissioners, who likewise upheld FINRA’s charges. This prompted Black to appeal his case to a federal district court in 2023. The matter is now pending before the Fourth Circuit, marking more than 10 years since the initial charges were brought by FINRA.

The Frank Black case demonstrates that protracted adjudications can take more than 10 years to resolve. An issue with SRO-style adjudication is that FINRA’s chain of review imposes one additional step of adjudicatory review, with three tiers of hearings (OHO, NAC, and SEC), compared to the two stages of review one would face if bringing a case before the SEC’s tribunal. This is further be affected compounding costs to litigate, which can be a barrier for many. While this burdensome extra step is also a feature in the PCAOB’s tribunal, 91% of its cases are never formally adjudicated and instead end in settlements.

Questions of Constitutionality in SRO Proceedings

There has been cause for concern regarding the constitutionality of SRO adjudicatory actions. While not widely litigated, there have been several cases challenging SRO adjudications. The most recent was the Alpine Securities Inc. v. FINRA (2025) decision rendered by the DC Circuit Court of Appeals. In that case, Alpine Securities, a broker-dealer, challenged the constitutionality of FINRA’s ability to adjudicate an expedited proceeding against it, seeking to expel Alpine for alleged theft of $54.5 million in ill-gotten fees from its clients. Alpine asserted, and the DC Circuit agreed, that a FINRA expulsion in absence of prior SEC review constituted as a violation of the private nondelegation doctrine. However, the court ruled in favor of FINRA, believing that Alpine wouldn’t experience the alleged “irreparable harm.”

It is concerning, yet unsurprising, that the Supreme Court denied review to the lower court ruling in Alpine, especially considering its June 2025 ruling in favor of the Federal Communication Commission’s universal service rule not violating the non-delegation doctrine. Various scholars and industry professionals have long considered FINRA as more akin to an unofficial federal agency rather than a private nonprofit, raising questions as to the legality of its structure.

Among these skeptics is Prof. Roberta Karmel, who argued early on that FINRA had been exercising delegated governmental powers. Karmel believed it was necessary for the federal government, including the courts, to recognize constitutional safeguards for FINRA members. Additionally, in an appealed case, SEC commissioners recently issued a rare reversal to one of FINRA’s collateral enforcement bars, asserting that it was excessively imposed. According to Nick Morgan of Investor’s Choice Advocates Network, the case, involving expulsion without SEC review, “drew attention to FINRA's aggressive tactics and may have motivated the SEC, courts, private parties, and now FINRA itself to take a closer look.”

Beyond FINRA, the Fifth Circuit struck down the FTC’s wrongfully delegated enforcement power to HISA in 2022. This came on the heels of Congress amending the law to reduce HISA’s quasi-legislative rule-making power after a prior court ruling against the SRO. In its decision, the Fifth Circuit relied upon the misuse of the private nondelegation doctrine whereby the FTC improperly delegated subpoena and investigatory powers to the entity. It may be only a matter of time before HISA’s nascent adjudicatory mechanism is struck down or amended as well.

Conclusion

SRO adjudication resembles agency adjudication. Rather than being viewed as a separate silo, SROs should be regarded an interconnected part of the federal agencies they adjudicate on behalf of. None of the four mentioned SROs would possess quasi-judicial power if not for the federal agencies they are related to. In this way, agency and SRO adjudications are intertwined, with the prospect of many SRO members receiving adjudicatory oversight from agency officials during final in-house appeals. Despite this interconnection, much of what the SROs adjudicate is uniquely distinctive from what their parent agencies typically deal with. SRO adjudications are mostly member-only focused while agency adjudication is typically open to all relevant market participants.

A concern by some has been the costly and time-consuming process of adjudicating before an SRO court. One must face an SRO tribunal prior to appealing their dispute to the overseeing agency. The PCAOB appears to be a unique exception to this issue, as 9/10 of its cases are settled before the Board directly through informal adjudication.

Lastly, SRO adjudication has faced similar constitutional concerns to federal agencies regarding the permissibility of delegated powers. SROs fall under the private nondelegation vein, receiving quasi-governmental authority from Congress and partially their parent agency (public to private conferral of power), while agency adjudicators function under traditional delegation (legislative power conferred to executive agencies). Understanding SROs as part of the overall picture of federal adjudication is essential to fully grasp the extent to which some regulators manage their legal disputes.