Stockbroker regulation; Refusal to register with the Financial Industry Regulatory Authority (FINRA); 15 USC §§ 78s(b) & (c); Violations of § 10(b) of the Exchange Act & Rule 10(b)–5; Whether the FINRA had statutory jurisdiction over plaintiff despite his refusal to register; §§ 78o–3(b)(7) & (h)(1); Securities & Exchange Commission (SEC) “exhaustion” requirement (§ 78y(c)(1); SEC v Jarkesy

The court denied petitioner-Smith’s petition for review of respondent-SEC’s order upholding sanctions against him for violations of securities-related laws and administrative rules, holding that he was under the FINRA’s jurisdiction despite his failure to register. He refused to register with the FINRA, a private, not-for-profit member organization that “promulgates rules for its members and associated persons, which the SEC reviews and modifies as it sees fit. FINRA also imposes discipline through its internal adjudicatory process for violations of its rules and federal securities law, again subject to SEC oversight.” The SEC enforces FINRA sanctions. Smith was chairman and CEO of his own consulting company (CSSC), which had a subsidiary (referred to as CSSC-BD) that was a licensed broker-dealer. He claimed he was exempt from registering with the FINRA where “he was not actively engaged in managing CSSC-BD’s securities business.” FINRA’s Department of Enforcement later filed a complaint against him “alleging that he violated a host of statutory provisions as well as industry regulations, including § 10(b) of the Exchange Act” and SEC Rule 10b–5, among others. FINRA ruled against him on all counts. Smith was ordered to pay $130,000 in restitution and barred from associating with any FINRA member. The SEC affirmed. Smith argued the SEC erred by holding that he was subject to FINRA regulatory jurisdiction. But “Congress has empowered national securities associations like FINRA to ‘provide that . . . its members and persons associated with its members shall be appropriately disciplined for violation’ of securities laws and regulations.” The court further noted that the “FINRA has disciplinary power over both members and ‘persons associated with its members.’” Thus, he still fell under the FINRA’s enforcement jurisdiction for his association with a member. Congress defined this to include anyone directly or indirectly controlling a member. “The SEC found that he did exercise such control” as he was CSSC’s chairman, CEO, and majority owner, and CSSC “wholly owned CSSC-BD, a FINRA member.” The court found that “Smith’s argument that FINRA lacks authority to discipline him runs counter to a straightforward reading of the relevant statutory text.” It did not reach the merits of his constitutional argument because he never raised the issue before the SEC, with the result that it was “statutorily barred from resolving the issue.” And he could not show “a ‘reasonable ground’ for his failure to exhaust his constitutional arguments at the agency level.”