In our post at the end of June of this year we analyzed the Supreme Court’s decision in SEC v Jarkesy, which held that the right to trial by jury in an Article III Court contained in the Seventh Amendment to the Constitution prohibits the SEC from seeking civil monetary penalties in internal administrative proceedings. Jarkesy, and the Supreme Court’s recent decision in Loper Bright that rejected the Chevron deference, manifest an intent of the Court to reigning in the powers of the “administrative state.” As we noted, Jarkesy has ramifications with respect to administrative proceedings by other federal agencies or commissions that can result in the imposition of a monetary penalty, and perhaps even as to proceedings at the state level—to the extent the Seventh Amendment is incorporated into state actions by virtue of the Fourteenth Amendment.
Another type of proceedings potentially subject to attack under Jarkesy are those brought by FINRA against broker dealers or their registered representatives. FINRA is a self-regulatory established by statute to regulate the broker/dealer industry, and its member firms and securities registered representatives. While not a federal agency per se, FINRA is subject to SEC oversight, including approval of its rules. FINRA (and its predecessor the NASD) has for many years had rules allowing it to conduct internal enforcement proceedings against member firms and registered representatives, and to impose monetary sanctions, the current minimum of which is $2500 (although most start at $5000) and the maximum goes well into six digits. The charges are brought and heard through FINRA’s Office of Hearing Officers, and FINRA wields its power to impose these sanctions quite aggressively. Most of the time targets settle with FINRA through the Acceptance, Waiver and Consent (AWC) process rather then requesting a hearing.
It was therefore only a matter of time before a person subject to a FINRA administrative proceeding would invoke Jarkesy to assert that FINRA cannot impose monetary sanctions because to do so would violate the right to a jury trial in an Article III court. The first such challenge occurred within days after Supreme Court issued the Jarkesy decision. In Blankenship v. Financial Industry Regulatory Authority, filed in the United States District Court for the Eastern District of Pennsylvania on July 14, 2024 a registered representative charged by FINRA with unsuitable mutual fund trading that allegedly caused excessive fees to customers sought an injunction to halt the FINRA disciplinary proceedings against him pursuant to the Jarkesy doctrine.
Mr. Blankenship’ attempt failed, however, and it did not take long. On September 4, 2024, the District Court dismissed the case, not on the basis of a Jarkesy analysis but rather on the grounds that the court lacked subject matter jurisdiction under Thunder Basin Coal Co. v. Reich, 510 U.S. 200 (1994)—which establishes the standards courts are to apply when there is a constitutional challenge to an administrative enforcement action filed in federal court. The court found that the first and perhaps most important Thunder Basin standard—whether denial of the court’s jurisdiction would foreclose Mr. Blankenship’s ability to obtain “meaningful judicial review”—mandated denial of jurisdiction because an adverse ruling by the FINRA Office of Hearing Officers is appealable multiple times: first to FINRA’s National Adjudicatory Counsel, then to the SEC, and finally to U.S. Court of Appeals. Having found that it lacked subject matter jurisdiction the court found no need to address the injunction issue and the Jarkesy impact on the proceedings. In the conclusion of the opinion, the court noted somewhat cryptically that “Mr. Blankenship will have to pursue his theory on direct appeal.”
It is hard to reconcile the Blankenship lack of standing opinion with the Jarkesy right to jury trial; it seems quite harsh to conclude that the right of appeal precludes standing and vitiates a Constitutional right. There are appeal rights in SEC administrative proceedings, too—so at some point the courts will have to reconcile the two. If Mr. Blankenship appeals the Third Circuit will be the first to have the opportunity to do so.
One thing is certain, however; Jarkesy will spawn much litigation over the coming years and some of the issues it created may be back in the Supreme Court.
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