Background
Eric Smith, the chairman and CEO of Consulting Services Support Corporation, managed a FINRA-registered broker-dealer subsidiary without registering with FINRA himself. FINRA sanctioned Smith for fraud and ordered restitution, a decision affirmed by the SEC. Smith petitioned for review, arguing FINRA lacked jurisdiction and that the proceedings violated his Seventh Amendment right to a jury trial.
The court’s reasoning
The court first addressed Smith’s statutory argument, concluding that FINRA has jurisdiction over persons associated with its members, including those who control a member firm. Regarding Smith’s constitutional claims, the court found he failed to exhaust his arguments before the SEC. The court rejected Smith’s justifications for non-exhaustion, including claims of futility and intervening change in law, noting the SEC had the competence to adjudicate the issues and could have provided a remedy by vacating sanctions.
As Smith never raised this issue before the SEC, we are statutorily barred from resolving the issue.
15 U.S.C. § 78y(c)(1)
What it means going forward
The decision reinforces the strict exhaustion requirements for challenging SEC and FINRA proceedings in federal court and confirms FINRA’s authority over non-member individuals who control member firms.