Summary
The Sixth Circuit denied Eric S. Smith’s petition for review of an SEC order upholding FINRA sanctions against him. The court held that FINRA had statutory jurisdiction because Smith controlled a FINRA member and therefore qualified as a person associated with that member, even though he had not registered with FINRA. The court declined to consider Smith’s Article III and Seventh Amendment arguments because he had not raised them before the SEC and did not establish a statutory exception to the exhaustion requirement.
Topics
Practice areas
Questions Presented
- Whether FINRA had statutory authority to discipline Smith even though he was not himself registered with FINRA.
- Whether Smith's constitutional challenges based on Article III and the Seventh Amendment could be considered when he failed to raise them before the SEC.
- Whether Smith had a reasonable ground under 15 U.S.C. § 78y(c)(1) for failing to exhaust his constitutional challenges before the SEC.
Holdings
- FINRA has statutory authority to discipline a person who controls a FINRA member because the Securities Exchange Act grants FINRA disciplinary jurisdiction over persons associated with its members, and the statutory definition includes persons directly or indirectly controlling a member. Smith controlled CSSC-BD through his ownership, management, and operational authority and therefore fell within FINRA's regulatory jurisdiction despite never registering personally.
- The court could not consider Smith's Article III and Seventh Amendment objections because 15 U.S.C. § 78y(c)(1) bars judicial consideration of an objection to an SEC order unless the objection was urged before the Commission or there was reasonable ground for failing to do so.
Key quotations
“On this record, Smith’s argument that FINRA lacks authority to discipline him runs counter to a straightforward reading of the relevant statutory text.” (8)
“A party like Smith, it follows, is not excused from making an argument before an agency simply because the argument is destined to lose.” (13)
“For today’s purposes, however, these points are all for naught. As Smith failed to make these arguments before the Commission, we cannot reach them, regardless of their strength.” (17)
Factual background
Smith was the chairman, CEO, and majority owner of Consulting Services Support Corporation, which wholly owned CSSC Brokerage Services, Inc., a registered FINRA broker-dealer. From 2010 to 2015, Smith directly managed debt offerings, directed CSSC-BD representatives to sell bonds using offering documents he prepared, personally solicited investors, and obtained $130,000 from four investors through an offering containing allegedly false or misleading statements. FINRA disciplined Smith for securities-law and industry-rule violations, ordered restitution, and barred him from associating with FINRA members; the SEC affirmed.
Procedural history
FINRA found that Smith violated federal securities laws, SEC Rule 10b-5, and FINRA and NASD rules, and ordered him to pay $130,000 in restitution and accept a bar from associating with FINRA members. The SEC affirmed FINRA's decision in an August 19, 2024 order. Smith petitioned the Sixth Circuit for review, challenging FINRA's regulatory jurisdiction and asserting Article III and Seventh Amendment objections. The court denied the petition because FINRA had statutory jurisdiction over Smith and his constitutional challenges were not exhausted before the SEC.