Preserving Seventh Amendment and Article III Challenges in FINRA Disciplinary Proceedings
How Smith v. SEC fits with SEC v. Jarkesy, Axon, Cochran, and Alpine Securities v. FINRA—and why issue preservation now matters in FINRA enforcement defense.
Key Takeaways for FINRA Respondents and Broker-Dealers
In Smith v. SEC, No. 24-3907 (6th Cir. Mar. 27, 2026), the Sixth Circuit denied a broker-dealer principal’s petition for review and upheld FINRA sanctions affirmed by the SEC, but the decision turned on issue exhaustion rather than the merits of the constitutional challenge.
The court refused to reach the petitioner’s Seventh Amendment and Article III arguments because he had not raised them before the SEC, holding that Exchange Act Section 25(c)(1), 15 U.S.C. § 78y(c)(1), barred judicial review.
In detailed dicta, the majority suggested that a properly preserved FINRA constitutional challenge may have force under SEC v. Jarkesy, 603 U.S. 109 (2024), especially where the enforcement action seeks legal remedies tied to securities-fraud claims.
A concurrence identified the unconstitutional-conditions doctrine as a likely next battleground: whether Congress may require access to the brokerage business to depend on surrendering jury-trial and Article III protections.
Read together with the Supreme Court’s 2025 denial of certiorari in Alpine Securities Corp. v. FINRA, Smith shows that challenges to FINRA’s enforcement structure remain active—but only for firms and associated persons that preserve those arguments at every stage.
Overview: Why Smith v. SEC Matters for FINRA Enforcement Defense
On March 27, 2026, the U.S. Court of Appeals for the Sixth Circuit decided Smith v. SEC, denying a petition for review of an SEC order that had affirmed FINRA disciplinary sanctions. The result favors FINRA and the SEC, but the reasoning gives broker-dealers, associated persons, and securities enforcement counsel a practical roadmap for future constitutional challenges. The court enforced FINRA’s jurisdiction and turned the petitioner away because he had defaulted his Seventh Amendment and Article III arguments by failing to raise them before the Commission. Along the way, however, the majority effectively invited the next respondent to bring the same challenge in a procedurally proper posture, and a concurrence sketched the theory most likely to carry it. For firms and registered persons in FINRA’s enforcement pipeline, the message is clear: constitutional objections to in-house adjudication remain live, but they are lost if they are not preserved early, clearly, and consistently.
Background: The FINRA Disciplinary Dispute in Smith v. SEC
Eric Smith founded and controlled Consulting Services Support Corporation (CSSC), serving as its chairman, CEO, and majority owner. A wholly owned subsidiary, CSSC Brokerage Services, Inc. (“CSSC-BD”), was a registered FINRA broker-dealer. Smith never personally registered, taking the position that he was exempt so long as he stayed out of the firm’s securities business. The factual premise of that theory did not hold up. Between 2010 and 2015 he managed three debt offerings, directed registered representatives to sell bonds on the basis of offering documents he prepared, and personally solicited roughly $130,000 from four investors. The last offering contained false or misleading statements about the company’s finances. FINRA’s Department of Enforcement charged violations of Section 10(b) of the Exchange Act and Rule 10b-5, Sections 17(a)(2) and (3) of the Securities Act, and FINRA and NASD rules. After a disciplinary proceeding, FINRA found against Smith, ordered $130,000 in restitution (payable to the victims or, if they could not be located, to FINRA), and barred him from associating with any member. The SEC affirmed in August 2024, and Smith petitioned the Sixth Circuit.
The Sixth Circuit’s Holdings on FINRA Jurisdiction and Issue Exhaustion
FINRA Jurisdiction Over Controlling Nonmembers
Smith argued that, because he never registered, a private self-regulatory organization could not discipline him. In effect, he contended that he was a member of the public being prosecuted by a non-governmental body. The court rejected the premise. FINRA’s disciplinary authority extends not only to members but to “person[s] associated with a member,” which Congress has defined to include anyone directly or indirectly controlling a member firm. See 15 U.S.C. §§ 78c(a)(21), 78o-3(b)(7). Because Smith controlled CSSC-BD, hiring and firing personnel, setting commissions, and soliciting investments, he fell squarely within FINRA’s enforcement ambit. Any objection to a private entity wielding that authority, the court observed, is a quarrel with Congress, which drew the jurisdictional lines.
Withdrawn Structural Claims: FINRA as an SEC “Aid” or Adjunct
Smith initially raised private-nondelegation and Appointments Clause challenges, the Alpine family of arguments. He withdrew them after FINRA represented that it acts only “subordinately” to the SEC, as an “aid,” a characterization Smith accepted as resolving the structural concerns. The court therefore did not reach them. As discussed below, that concession is a tactical inflection point future respondents should weigh carefully, because it cuts in two directions at once.
Issue Exhaustion: Why the Jarkesy Challenge Was Forfeited
Smith’s Seventh Amendment and Article III argument never reached the merits. Exchange Act Section 25(c)(1), 15 U.S.C. § 78y(c)(1), bars a reviewing court from considering any objection not “urged before the Commission” unless there was “reasonable ground” for the failure. Smith conceded he had not raised the issue before the SEC and offered three justifications, each of which the court rejected:
Agency competence. The SEC routinely adjudicates constitutional challenges to its own adjudicatory structure, so it was competent to hear this one. Axon Enterprise, Inc. v. FTC, 598 U.S. 175 (2023), and Free Enterprise Fund v. PCAOB, 561 U.S. 477 (2010), address only whether a litigant may detour to district court before the agency finishes, not whether a party who elects the statutory-review track may skip exhaustion within it.
Intervening change in law. Jarkesy was not a change in law, because Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989), effectively dictated its result. And even if it were, Jarkesy came down while Smith’s case was still pending before the SEC; he could have sought supplemental briefing or reconsideration but did not.
Futility. Futility turns on whether the agency could grant a remedy, not on whether the argument was likely to lose. The SEC could have vacated the FINRA sanctions and refiled in federal court, where a jury would be available, so raising the claim would not have been futile.
The Dicta That Matters: A Jarkesy Roadmap for FINRA Respondents
Although it could not reach the merits, the majority went out of its way to explain that, had Smith preserved the issue, he “may well” have been entitled to a jury trial. The court applied Jarkesy‘s two-part framework and accepted the parties’ shared premise that the SEC, not FINRA, is the operative adjudicator. The court first asked whether the action was legal in nature. The Section 10(b) and Rule 10b-5 fraud theory FINRA pursued is the very provision at issue in Jarkesy and the modern descendant of common-law fraud, which marks it as a legal claim. The restitution order looked legal rather than equitable as well. Because the investor funds could not be traced and FINRA imposed joint-and-several liability, and because FINRA would accept payment to itself if the victims could not be found, the order functioned as personal monetary liability rather than a constructive trust over identifiable property.
Public-Rights Doctrine and the Limits of FINRA Consent
The court then turned to the public-rights doctrine. Jarkesy held that a securities-fraud action seeking legal remedies vindicates private rights that cannot be removed from the Article III courts. The SEC’s “tradition of self-regulation” defense failed because that tradition rested on voluntary membership. Historically, brokers consented to exchange rules and arbitration as the price of joining a private club. Smith was a non-consenting nonmember, and the agency identified no historical practice of an SRO disciplining non-consenting nonmembers. The overlap with Jarkesy, in the court’s words, made that precedent “extremely difficult to distinguish.” Judge Murphy concurred to spotlight a deeper question. Since 1983, no one may lawfully conduct a securities business without joining an SRO; the curbstone broker who could trade outside any exchange is gone. That makes the “consent” rationale for FINRA’s procedures strained, because Congress has effectively conditioned the privilege of working as a broker on surrendering Article III and jury-trial protections. Murphy framed, without resolving, two questions for future cases: why a history of voluntary self-regulation should control in a world of compelled membership, and when, if ever, the government may compel individuals to forgo a jury and an Article III judge as a condition of doing business. Judge Bloomekatz concurred only in the judgment. She agreed on jurisdiction and exhaustion but objected that the majority should not have opined at length on the merits of a claim it had no power to decide. The disagreement is a useful signal. The favorable merits analysis is dicta, persuasive but not binding, and a future panel could view the question with fresh eyes.
How Smith, Jarkesy, Axon, Cochran, and Alpine Shape FINRA Constitutional Challenges
Four decisions now trace a coherent arc. The table below situates Smith among them.
| Decision | Forum / Year | Core Holding | Significance for FINRA Enforcement |
| Axon Enterprise, Inc. v. FTC, 598 U.S. 175 (2023) (decided with SEC v. Cochran) | U.S. Supreme Court, 2023 | District courts have jurisdiction over structural constitutional challenges to agency adjudication; a litigant need not first complete the administrative proceeding to attack the tribunal’s legitimacy. | Opened a parallel district-court route to challenge the FINRA and SEC adjudicatory structure before sanctions are final, a route a respondent must choose deliberately. |
| SEC v. Jarkesy, 603 U.S. 109 (2024) | U.S. Supreme Court, 2024 | The Seventh Amendment entitles a defendant to an Article III jury trial when the SEC seeks civil penalties for securities fraud; such claims are legal in nature and not “public rights.” | Supplies the substantive weapon. Because FINRA enforces the same anti-fraud provisions, its in-house process is exposed to the same jury-trial objection once the matter reaches the SEC. |
| Alpine Securities Corp. v. FINRA, 121 F.4th 1314 (D.C. Cir. 2024), cert. denied, 2025 WL 1549780 (U.S. June 2, 2025) | D.C. Circuit, 2024 (cert. denied 2025) | Likelihood of success on a private-nondelegation theory: FINRA may not unilaterally expel a member and bar it from the industry without prior SEC review. The court did not resolve the ultimate merits. | Trained the structural critique directly on FINRA. Prompted FINRA’s 2025 rule changes inserting SEC review before expulsions take effect. The cert denial left the deeper questions open. |
| Smith v. SEC, No. 24-3907 (6th Cir. Mar. 27, 2026) | Sixth Circuit, 2026 | FINRA had statutory jurisdiction over a controlling nonmember; the Seventh Amendment and Article III claim was forfeited for failure to exhaust before the SEC. Strong merits dicta favored the challenger. | First circuit decision to map Jarkesy onto a FINRA-origin disciplinary action and conclude the jury-trial logic transfers, while showing how easily the claim is lost to procedural default. |
Read in sequence, the path is clear. Axon and its companion case, SEC v. Cochran, 598 U.S. 175 (2023), opened the courthouse door, holding that a party may bring a structural constitutional challenge to agency adjudication in district court without first exhausting the administrative process. Jarkesy (2024) supplied the substantive weapon, recognizing a Seventh Amendment right to an Article III jury in SEC fraud-penalty actions. Alpine (D.C. Cir. 2024) aimed the structural critique at FINRA itself, finding a likelihood of success on private nondelegation and enjoining expulsion without prior SEC review, though the Supreme Court denied certiorari in June 2025 and left the ultimate merits unresolved. Smith (2026) is the first circuit decision to map Jarkesy directly onto a FINRA-origin disciplinary matter and to conclude that the jury-trial logic transfers, while at the same time showing how readily the claim is forfeited.
The cases also expose FINRA’s central defensive maneuver and its double edge. Characterizing itself as a mere “aid” or “adjunct” to the SEC is what defeated Smith’s nondelegation and Appointments Clause claims, which he withdrew. But that same concession makes the SEC the relevant adjudicator for Jarkesy purposes, and the SEC’s in-house imposition of fraud-based monetary sanctions without a jury is precisely what Jarkesy forbids. FINRA cannot comfortably be “just a private aid” for the structural claims and “not the real adjudicator” for the jury-trial claim at the same time.
Practical Implications for Broker-Dealers, Associated Persons, and FINRA Enforcement Counsel
Preserve the Issue Early and Often. The most important lesson of Smith is procedural. A respondent who hopes to preserve a Jarkesy and Article III challenge must raise it before the FINRA hearing panel and the National Adjudicatory Council, brief it squarely to the SEC, and, if a controlling decision issues mid-proceeding, file a supplemental submission or a reconsideration motion to put the agency on notice. Section 78y(c)(1) forfeits anything less, however strong the merits.
Choose the Forum Deliberately. Axon permits an immediate district-court suit attacking the structure of the proceeding before it concludes; the statutory-review track through the SEC carries the exhaustion strictures Smith enforced. The strategic choice between a front-end Axon-type structural suit and a merits defense that meticulously preserves constitutional objections should be made deliberately, with counsel, before the first responsive pleading, not improvised on appeal.
Be Careful Before Conceding FINRA Is a Mere “Aid.” Smith withdrew his nondelegation and Appointments Clause claims in exchange for FINRA’s “subordinate aid” characterization. A future respondent should weigh whether to contest that framing. If FINRA’s privately employed hearing officers exercise significant, unsupervised enforcement power, the theory Judge Walker advanced in Alpine, then Appointments Clause and Article II removal arguments remain live, and the “private aid” concession may surrender more than it gains.
Watch the Unconstitutional-Conditions Frontier. Judge Murphy’s concurrence is an invitation. The next generation of challenges may not turn on whether FINRA proceedings facially violate Article III, but on whether the government may compel brokers to waive those protections as the price of admission to the industry. If that theory gains traction, its reach extends beyond FINRA to other compelled-membership SRO regimes, including the National Futures Association, and potentially to mandatory-licensure schemes more broadly.
FINRA’s Rulemaking Patch Does Not Fix the Jury-Trial Issue. After Alpine, FINRA amended its rules, effective June 2025, to require SEC review before expulsions, membership cancellations, and similar sanctions take effect, inserting the governmental review that the private-nondelegation theory demands. But that fix does nothing for the Seventh Amendment and Article III problem Smith spotlights. SEC appellate review is not a jury, and it is not an Article III trial court; it is the absence of those, not the absence of SEC oversight, that Jarkesy targets. The jury-trial vulnerability survives the rule change intact.
Expect More Litigation—and Potentially a Circuit Split. Smith‘s pro-FINRA result rests on forfeiture, not on any endorsement of FINRA’s structure, and its merits dicta favor challengers. If another circuit reaches the merits in a case where the respondent preserved the issue, a split could form and present the question the Supreme Court declined to take in Alpine.
The Remedy Stakes Are Significant. Under Lucia v. SEC, 585 U.S. 237 (2018), an adjudication tainted by a structural defect ordinarily requires a fresh proceeding before a properly constituted decisionmaker, which, for a Jarkesy violation, means an Article III jury trial. That is an outcome FINRA and the SEC have strong incentives to avoid, and it explains both the 2025 rulemaking and the care with which the agencies now litigate forum questions.
Conclusion: Preserve FINRA Constitutional Objections or Lose Them
Smith v. SEC is, on its surface, a FINRA victory, but a fragile one. The court enforced FINRA’s jurisdiction over a controlling nonmember and denied the petition solely because the petitioner defaulted his constitutional claim. The opinion’s reasoning, and Judge Murphy’s concurrence, read like a brief in waiting for the next respondent who preserves the argument. For firms and registered persons facing FINRA enforcement, the imperative is concrete: treat the Seventh Amendment, Article III, nondelegation, and Appointments Clause objections as live and material, and preserve them at every stage of the proceeding, or lose them entirely.
Frequently Asked Questions About Smith v. SEC and FINRA Enforcement
Did Smith v. SEC hold that FINRA disciplinary proceedings are unconstitutional?
No. The Sixth Circuit denied Smith’s petition and did not reach the merits of his Article III and Seventh Amendment arguments because those arguments were not exhausted before the SEC.
Are FINRA respondents entitled to jury trials after Smith and Jarkesy?
No. The majority stated in dicta that Smith may well have had a jury-trial argument if he had preserved it, but the court did not decide that issue.
Does FINRA regulate registered investment advisers?
Generally, no. FINRA regulates broker-dealers and their associated persons. Registered investment advisers are generally regulated by the SEC or state securities regulators. Dual registrants and affiliated businesses may implicate both regimes.
Should broker-dealers and associated persons still comply with FINRA Rule 8210 requests?
Yes. Smith does not reduce FINRA’s Rule 8210 authority. Objections should generally be preserved through counsel while the firm or associated person complies or seeks appropriate accommodations.
What is the most important lesson for preserving FINRA constitutional challenges?
Preserve issues early. Constitutional, jurisdictional, procedural, evidentiary, and sanctions arguments should be identified and preserved before FINRA, the NAC, and the SEC where applicable.
About Robert Moreiro
Robert Moreiro is a financial services attorney with more than 20 years of experience advising registered investment advisers, broker-dealers, and associated persons on securities regulation, compliance, and enforcement matters. He counsels clients on SEC, FINRA, state registration, compliance policies, CCO matters, and regulatory examinations and investigations. Robert has served as an expert witness in FINRA arbitration, is recognized in the 2025 and 2026 editions of The Best Lawyers in America for Securities Regulation, and holds the Investment Adviser Certified Compliance Professional and Certified Securities Compliance Professional designations.
Need guidance on a FINRA enforcement matter? Practus financial services attorneys advise broker-dealers, registered investment advisers, and associated persons on SEC and FINRA compliance, examinations, investigations, and enforcement defense.
