FINRA Beats First Post-Jarkesy Challenge

On September 4, 2024, Judge John Murphy of the U.S. District Court for the Eastern District of Pennsylvania dismissed on jurisdictional grounds the first post-Jarkesy constitutional challenge to FINRA’s disciplinary proceedings in Blankenship v. Financial Industry Regulatory Authority.^[1]

As we discussed when the complaint was filed in July 2024, Blankenship, a Philadelphia-based broker, pointed to SEC v. Jarkesy to argue that a disciplinary proceeding he is facing before FINRA’s Office of Hearing Officers (“OHO”) violates his Seventh Amendment right to a jury trial.^[2] FINRA had filed a formal disciplinary complaint against Blankenship in 2023, alleging that he had engaged in unsuitable mutual fund trading to generate excess commissions. In June 2024, the Supreme Court held in Jarkesy^[3] that defendants have a Seventh Amendment right to a jury trial in an Article III court when the SEC seeks civil monetary penalties for claims analogous to common law claims. One month later, Blankenship sought to enjoin the FINRA proceeding, asserting that because FINRA’s claims against him are analogous to common law fraud claims and he is subject to civil penalties, he is entitled to a jury trial under Jarkesy. Blankenship’s constitutional challenge—filed before his hearing was to begin—also relied upon the Supreme Court’s 2023 decision in Axon Enterprises v. FTC,^[4] which held that parties subject to certain administrative proceedings may collaterally attack the constitutionality of those proceedings in a district court without waiting until a final agency action is issued in the administrative proceedings.

In its motion to dismiss, FINRA chiefly argued that the district court lacked jurisdiction to hear Blankenship’s challenge to the FINRA proceeding before his hearing under Supreme Court precedent in Thunder Basin Coal v. Reich, which held that when Congress has laid out a comprehensive structure for agencies to enforce rules and regulations, defendants generally cannot go to court to challenge the proceeding until the agency has reached a “final determination.”^[5] FINRA also argued that Axon applies only to challenges that threaten the agency’s very existence, which, it argued, is not the case with Blankenship. Last, FINRA argued that Blankenship had waived his right to challenge FINRA’s process, having agreed to its rules as a private self-regulatory organization with congressional authority to regulate its members—not a federal agency—when he registered as a broker.

Judge Murphy ultimately agreed with FINRA that the district court lacked jurisdiction to hear Blankenship’s challenge prior to his exhausting all administrative remedies. He found that all three factors in a three-part test established in Thunder Basin favored dismissal: (1) whether precluding jurisdiction will “foreclose all meaningful judicial review” of the claim; (2) whether the claim is “wholly collateral” to the statutory review provisions; and (3) whether the claim at hand is outside the agency’s expertise.

Applying the first factor, which the Court deemed “most significant,” the Court held that dismissal would not foreclose Blankenship’s ability to obtain meaningful judicial review because the appeals process for FINRA’s disciplinary proceedings affords him that review. In the event respondents are unsuccessful at hearings before OHO, they can appeal OHO decisions to the National Adjudicatory Counsel (the “NAC”), FINRA’s appellate body. From there, they may appeal to the SEC, and then ultimately up to a U.S. Court of Appeals. Judge Murphy reasoned that this process affords Blankenship “complete review of his claims in an Article III court.”

Turning to the second and third factors, the Court found (citing Axon) that Blankenship’s claims “are not wholly collateral [to the Securities Exchange Act’s review provisions] because they do not challenge FINRA’s existence, but instead depend on FINRA’s proceedings and the interpretation of its rules” and that “the interpretation or application of FINRA rules is certainly within FINRA and the SEC’s expertise, because they jointly make those rules.”^[6]

On this basis, the Court dismissed Blankenship’s Seventh Amendment claims for lack of subject matter jurisdiction without reaching the merits of his preliminary injunction motion, including whether FINRA is a government actor and whether its tribunals may levy certain penalties without a jury.

This decision is surely a relief to FINRA, which, as we have discussed, is facing various constitutional challenges creating uncertainty for its enforcement program. However, even in this victory, it is worth noting a certain “tension” Judge Murphy flagged as inherent in FINRA’s positions:

“FINRA advances two seemingly incongruous positions against Mr. Blankenship’s motion . . . FINRA first argues that we lack subject matter jurisdiction under [] Thunder Basin, which governs when a constitutional challenge to an administrative enforcement action may be brought collaterally in a district court . . . [a]t the same time, FINRA also argues that its tribunals do not implicate the Seventh Amendment because it is a self-regulatory organization (SRO) formed as a corporation under Delaware law and therefore not a part of the government.”^[7]

Judge Murphy did not have to resolve this tension in order to determine that the district court lacked jurisdiction to hear Blankenship’s challenge, but FINRA will likely need to find a way to square these positions when it reaches the merits stage of these various challenges.

[1] D.I. 26, 2:24-cv-03003-JFM (E.D. Pa. Sept. 4, 2024).

[2]See FINRA Faces Post- Jarkesy Challenge to its Enforcement Program (aoshearman.com).

[3] 144 S. Ct. 2117 (2024).

[4] 598 U.S. 175 (2023).

[5]Thunder Basin Coal Co v. Reich, 510 U.S. 200 (1994).

[6]Blankenship, D.I. 26, 2:24-cv-03003-JFM, at 6. 

[7]Id. at 1.