Paul W. Grimm, District Judge.
Plaintiff Thomas Howes has filed this federal lawsuit seeking an order expunging customer complaints from a securities industry regulator's database. The regulator, the Financial Industry Regulatory Authority, Inc. ("FINRA"), has moved to dismiss the suit under Rule 12(b)(6) of the Federal Rules of Civil Procedure. Although FINRA has not sought a dismissal for lack of subject-matter jurisdiction under Rule 12(b)(1), my own review of the relevant case law has uncovered several federal district court decisions remanding similar expungement petitions to state court on jurisdictional grounds. See Godfrey v. Fin. Indus. Regulatory Auth., Inc., No. 16-2776 PSG (PJWx), 2016 WL 4224956, at *5 (C.D. Cal. Aug. 9, 2016); Flowers v. Fin. Indus. Regulatory Auth., Inc., No. 15cv2390 DMS (JMA), 2015 WL 9487450, at *3 (S.D. Cal. Dec. 24, 2015); Doe v. Fin. Indus. Regulatory Auth., Inc., No. 13-6436 DDP ASX, 2013 WL 6092790, at *4 (C.D. Cal. Nov. 19, 2013); Spalding v. Fin. Indus. Regulatory Auth., Inc., No. 1:12-CV-1181-RWS, 2013 WL 1129396, at *6 (N.D. Ga. Mar. 19, 2013); In re Lickiss, No. C-11-1986 EMC, 2011 WL 2471022, at *4 (N.D. Cal. June 22, 2011). In view of these precedents, I am denying FINRA's motion without prejudice and ordering the parties to brief the issue of whether this Court has subject-matter jurisdiction over Mr. Howes's Complaint.
The Securities Exchange Act of 1934 (the "Exchange Act") "vests registered national securities associations with a prominent role in the administration and enforcement of federal securities law." Turbeville v. Fin. Indus. Regulatory Auth., 874 F.3d 1268, 1270 (11th Cir. 2017). FINRA, a private, not-for-profit Delaware corporation, is one of those registered associations, commonly known as "self-regulatory organizations," or SROs. See id. In this capacity, FINRA enjoys "regulatory oversight of all securities firms that do business with the public" and is responsible for providing "professional training, testing[,] and licensing of registered persons" and for arbitrating and mediating disputes. Sacks v. SEC, 648 F.3d 945, 948 (9th Cir. 2011) (quoting 72 Fed. Reg. 42,169, 42,170 (Aug. 1, 2007)).
Among the various requirements the Exchange Act imposes on SROs such as FINRA is an obligation to "establish and maintain a system for collecting and retaining registration information." 15 U.S.C. § 78o-3(i)(1)(A). The statute defines "registration information" as "information reported
Mr. Howes has worked in the investment field for nearly three decades. See CRD Entry 10-11, ECF No. 6-1. In February 2018, he filed two arbitration claims in FINRA's Office of Dispute Resolution, each seeking to expunge certain records from the CRD. See July 2018 Arbitration Award 1-2, ECF No. 1-4. The cases were soon consolidated. See id. at 2-3.
Mr. Howes's first petition, dated February 1, 2018, named Morgan Stanley as the respondent. See Morgan Stanley Pet. 1, ECF No. 1-5. The petition sought the expungement of a complaint a customer filed against him on July 24, 2001, while Mr. Howes was a senior financial advisor for Smith Barney. See id. at 2. In it, Mr. Howes recounted that the customer filed the complaint after the "Smith Barney wire room accidentally did a syndicate trade in" the customer's account in spite of the customer's explicit instruction that he wanted "Mr. Howes to sit tight with his investments [and] not to purchase anymore [sic] securities, or increase his margin." Id. at 4. The petition alleged that Mr. Howes "had nothing to do with the trade" and that Smith Barney corrected the error. Id. The complaint, however, could still be found in the CRD. See id.
Mr. Howes filed his second petition on February 2, 2018, this time naming Citigroup Global Markets as respondent. See Citigroup Pet., ECF No. 1-6; Arbitration Award 2. There, Mr. Howes sought to expunge a pair of complaints another customer had filed against him, also in the early 2000s. See Citigroup Pet. 1-3. The petition noted that Mr. Howes had paid the customer $100,000 in connection with the first complaint and was "told by Citi-Group that this matter was put to bed." Id. at 3. It argued the second claim, filed on May 19, 2003, "was factually impossible and clearly erroneous." Id.
In July 2018, a three-member FINRA arbitration panel denied all of Mr. Howes's claims in their entirety. See Arbitration Award 3. This federal lawsuit soon followed. Mr. Howes, who is representing himself, named FINRA as the lone defendant and styled the Complaint as a "Petition for Declaratory Relief and Expungement." Compl. 9, ECF No. 1. The Complaint accuses FINRA of reporting "erroneous information" about him on BrokerCheck and the CRD. Id. at 13. It acknowledges that he previously sought to expunge the allegedly false complaints through FINRA's arbitration procedures but alleges those procedures "are flawed in that they only require member firms to retain documents and information for 6 years." Id. at 10; see 17 C.F.R. § 240.17a-4 (2014). It says he "could have easily proven the customer complaints [were] false" if FINRA had required the companies he named as respondents to preserve documents relating to the complaints against him,
FINRA moved on November 30, 2018, to dismiss the Complaint. FINRA Mem., ECF No. 6. Its motion raises three arguments: first, that Mr. Howes is collaterally estopped from litigating this suit against FINRA following the denial of his arbitration claims; second, that FINRA enjoys absolute immunity in its roles as a regulator and as an arbitration forum; and, third, that Mr. Howes "has no private right of action against FINRA for its regulatory acts and omissions, including how it administers the regulatory scheme for securities reporting, disclosure and expungement, or for how it administers arbitration proceedings." Id. at 2-3. Alternatively, the motion urges the Court to "exercise its discretion to deny declaratory relief pursuant to the Declaratory Judgment Act, 28 U.S.C. § 2201." Id. at 3.
FINRA's motion has been fully briefed and is ripe for a decision. See ECF Nos. 6-1, 10, 13. Before addressing the organization's arguments, though, this Court has an obligation to assure itself of its jurisdiction, no matter whether either of the parties has challenged it. See United States v. Wilson, 699 F.3d 789, 793 (4th Cir. 2012); Brown v. Huntington Ingalls, Inc., No. 4:13CV26, 2013 WL 5591932, at *3 (E.D. Va. July 25, 2013) ("[W]hen a district court is aware of the absence of subject matter jurisdiction, it must `raise such lack of subject-matter jurisdiction on its own motion,' without regard to the positions of the parties.") (quoting Ins. Corp. of Ireland v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 702, 102 S.Ct. 2099, 72 L.Ed.2d 492 (1982)). "If the court determines at any time that it lacks subject-matter jurisdiction, the court must dismiss the action." Fed. R. Civ. P. 12(h)(3).
"Jurisdiction of the lower federal courts is . . . limited to those subjects encompassed within a statutory grant of jurisdiction." Ins. Corp. of Ireland, 456 U.S. at 701, 102 S.Ct. 2099. Mr. Howes's Complaint asserts that this Court has federal-question jurisdiction over this action under 28 U.S.C. § 1331. See Compl. 4. It cites, in particular, the Securities Exchange Act of 1934, 15 U.S.C. § 78a, as a federal law at issue in this case.
Although FINRA has not challenged this Court's jurisdiction, subject matter jurisdiction "cannot be conceded by any party; nor can it be granted by this Court in its discretion." McGahey v. Giant Food, Inc., 300 F.Supp. 475, 477 (D. Md. 1969). It is a threshold matter that, if at all in doubt, must be addressed before this Court may reach the merits of FINRA's arguments in support of a dismissal under Rule 12(b)(6). Such a doubt is present here, as my review of federal district court cases involving similar petitions to expunge FINRA records has uncovered five decisions remanding the petitions to state court for lack of federal subject-matter
Courts that have assessed this issue typically have focused, as I will here, on FINRA Rule 2080, which sets out a procedure for expunging records from the CRD.
In cases where FINRA has sought to remove an expungement petition from state court, the organization has identified two possible bases for federal jurisdiction.
Section 78aa provides, in relevant part, that the federal district courts "shall have exclusive jurisdiction of violations of this chapter or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations thereunder." 15 U.S.C. § 78aa(a). Across the various cases that have analyzed FINRA's arguments involving this provision, the inquiry has invariably boiled down to whether the plaintiff was seeking to enforce a "duty created by [the Exchange Act] or the rules and regulations thereunder."
In In re Lickiss, the federal district court started with the premise that, under a precedent binding on that court (but, notably, not on this one), the universe of "rules and regulations thereunder," to which § 78aa alludes, includes rules issued by FINRA. 2011 WL 2471022, at *3 (citing Sparta Surgical Corp. v. Nat'l Ass'n of Sec. Dealers, Inc., 159 F.3d 1209, 1212 (9th Cir. 1998)). Accordingly, rules such as Rule 2080 might, conceivably, impose a "duty" capable of enforcement in federal court under § 78aa. The court, however, concluded that Rule 2080 did not impose any such duty, explaining: "While FINRA Rule 2080 addresses expungement, it only sets forth procedures, not a substantive duty." Id. at *4. Specifically, it stated:
Id.
The court likewise rejected FINRA's argument that the Exchange Act itself imposed a duty to expunge. See id. at *3. FINRA, it stated, had failed to identify any statutory provisions referencing such a duty. See id. And while the Exchange Act does impose a "duty to `collect[ ] and retain[ ] registration information,'" the court observed that the plaintiff there was "not asking any court to compel FINRA to `collect[ ] and retain[ ] registration information.'" Id. (quoting 15 U.S.C. § 78o-3(i)(1)(A)). Rather, it stated, the plaintiff was "asking a court to expunge registration information which has been collected and retained by FINRA. FINRA has failed to specifically identify any duty it has to expunge." Id. At least two other courts have cited Lickiss favorably and have reached the same conclusion: that petitions to expunge customer claims or arbitration disclosures from the CRD are
The Lickiss court had no occasion to consider whether a FINRA expungement petition might have come within the court's federal-question jurisdiction under 28 U.S.C. § 1331, because FINRA did not raise this argument in that case. See In re Lickiss, 2011 WL 2471022, at *2. Since then, however, four other courts have addressed the issue and have concluded it does not. See Godfrey, 2016 WL 4224956, at *5; Flowers, 2015 WL 9487450, at *3; Doe, 2013 WL 6092790, at *3; Spalding, 2013 WL 1129396, at *3-*6.
The federal-question jurisdiction statute confers on the district courts "original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States." 28 U.S.C. § 1331. "For statutory purposes, a case can `aris[e] under' federal law in two ways." Gunn v. Minton, 568 U.S. 251, 257, 133 S.Ct. 1059, 185 L.Ed.2d 72 (2013). First, "[i]n the `vast majority' of cases, federal question jurisdiction exists under section 1331 only if federal law creates the plaintiff's cause of action." Columbia Gas Transmission Corp. v. Drain, 191 F.3d 552, 557 (4th Cir. 1999) (quoting Merrell Dow Pharm. Inc. v. Thompson, 478 U.S. 804, 808, 106 S.Ct. 3229, 92 L.Ed.2d 650 (1986)). Second, section 1331
Commonwealth of Virginia ex rel. Hunter Labs. L.L.C. v. Commonwealth, 828 F.3d 281, 287 (2016) (internal citation omitted) (quoting Gunn, 568 U.S. at 258, 133 S.Ct. 1059).
In Spalding v. Financial Industry Regulatory Authority, Inc., an investment advisor sued FINRA in a Georgia state court, seeking a declaratory judgment under Georgia law expunging information from the advisor's CRD and BrokerCheck profiles. 2013 WL 1129396, at *1-*2. FINRA removed the suit to federal court on the basis of federal-question jurisdiction, arguing, first, that the advisor's request was, in actuality, a plea to relieve FINRA of a duty arising under the Exchange Act and, second, that it would require the court to interpret a federal law — specifically, FINRA Rule 2080. See id. at *3. The district court rejected both arguments. See id. at *3-*6. First, amid a lengthy discussion of Lickiss, the court characterized Rule 2080 as a mere "procedural rule" and noted that FINRA had otherwise been unable to "point to any authority establishing a duty to expunge." Id. at *4. Second, the court agreed with the advisor that "expungement does not implicate a substantial issue of federal law," as Rule 2080 "does not provide any substantive criteria for courts to apply to determine whether information should be expunged from an investment advisor's record." Id. Concluding the case did not present a federal question, the court granted the advisor's motion for remand. See id. at *6.
The result was the same in Doe v. Financial Regulatory Authority, Inc., No. 13-6436 DDP ASX, 2013 WL 6092790 (C.D. Cal. Nov. 19, 2013). There, upon removal, a broker-dealer sought to remand his state
These precedents, though not binding here, call this Court's jurisdiction into question. While Mr. Howes's Complaint refers to FINRA's "statutory obligations under the Exchange Act to maintain customer dispute information and make that information publicly available," Compl. ¶ 23; see also id. ¶ 26 (demanding expungement on the grounds that the disputed records "were made pursuant to the FINRA rules, and are maintained pursuant to FINRA rules"), it does not allege that FINRA failed to fulfill either of these particular obligations. And while Mr. Howes complains that FINRA's failure to require member firms to retain documents for more than six years deprived him of a "fair arbitration," id. ¶ 26, his Complaint does not identify any federal laws that FINRA might in theory have violated. See Hunter Labs., 828 F.3d at 286 (noting that, under § 1331, a federal district court "may examine only that which `necessarily appears in the plaintiffs statement of his own claim' in assessing whether there is jurisdiction over the action" (quoting Franchise Tax Bd. of State of Cal. v. Construction Laborers Vacation Trust for Southern California, 463 U.S. 1, 10, 103 S.Ct. 2841, 77 L.Ed.2d 420 (1983))).
While I might simply conclude that subject-matter jurisdiction is lacking here,
While I await the parties' briefing on this threshold issue, there will be no occasion to review the merits of FINRA's Rule 12(b)(6) motion (ECF No. 6). I am therefore denying FINRA's motion without prejudice. FINRA may refile its motion if, upon review of the parties' forthcoming briefs, I conclude that Mr. Howes's suit is within this Court's jurisdictional power to hear.
Accordingly, it is this 11th day of June, 2019, by the United States District Court for the District of Maryland, hereby ORDERED that:
Unless otherwise ordered by the Court, briefs will be limited to fifteen pages, double spaced, and will be simultaneously filed by the parties by July 1, 2019. No responses are permitted without further authorization from the Court.
