FINRA’s Jurisdiction Over Unregistered “Control Persons” and Strict § 78y(c)(1) Exhaustion of Jarkesy-Based Jury-Trial Objections

Introduction

In Eric Smith v. SEC (6th Cir. June 16, 2026), the Sixth Circuit reviewed an SEC order affirming FINRA discipline imposed on Eric S. Smith, the chairman/CEO and majority owner of a corporate parent that wholly owned a FINRA-member broker-dealer (CSSC-BD). FINRA found that Smith orchestrated and personally participated in securities offerings containing false or misleading statements and solicited investors, leading to sanctions including restitution and a bar from associating with FINRA members.

The petition presented two central issues: (1) whether FINRA had statutory jurisdiction to discipline Smith even though he never registered with FINRA; and (2) whether the SEC/FINRA adjudicative route violated Article III and the Seventh Amendment in light of SEC v. Jarkesy. The court rejected the statutory challenge on the merits and declined to reach the constitutional challenge because Smith failed to raise it before the SEC as required by the Exchange Act’s exhaustion rule, 15 U.S.C. § 78y(c)(1).

Summary of the Opinion

  • FINRA jurisdiction: The court held that FINRA’s disciplinary authority extends to “persons associated with” a FINRA member, including anyone “directly or indirectly controlling” a member. 15 U.S.C. § 78c(a)(21). Because Smith controlled the corporate structure that owned the member broker-dealer and exercised control in practice, FINRA had jurisdiction notwithstanding his refusal to register.
  • Constitutional claims barred by non-exhaustion: The court held that 15 U.S.C. § 78y(c)(1) barred judicial review of Smith’s Article III and Seventh Amendment objections because he did not present them to the SEC and lacked “reasonable ground” for failing to do so.
  • Important dicta: The majority suggested that, had Smith exhausted, his Jarkesy-based jury-trial argument “may well” have had merit—particularly because the enforcement resembled common-law fraud and the restitution remedy appeared “legal” rather than “equitable.”
  • Separate writings: Judge Murphy concurred to flag an “unconstitutional conditions” problem in compelled industry membership regimes; Judge Bloomekatz concurred in the judgment but criticized the majority’s extended constitutional dicta in an unexhausted-issue case.

Analysis

1) Precedents Cited

A. FINRA’s status, powers, and relationship to the SEC

  • Mohlman v. FINRA, 977 F.3d 556 (6th Cir. 2020): Used to describe FINRA as a private, not-for-profit entity and to reinforce the modern SRO structure. It also appears in Judge Bloomekatz’s writing to support the proposition that statutory limits constrain what courts may consider under § 78y(c)(1).
  • Fiero v. FINRA, 660 F.3d 569 (2d Cir. 2011): Cited for the distinction between FINRA’s power to impose discipline and its lack of independent power to enforce sanctions in federal court.
  • SEC v. Mohn, 465 F.3d 647 (6th Cir. 2006): Cited to show the SEC’s statutory ability to pursue enforcement in federal court, relevant to the court’s futility analysis (the SEC could remedy a Seventh Amendment issue by vacating SRO sanctions and proceeding in court).

B. Private delegation and “adjunct” theories (raised, then withdrawn)

  • Sunshine Anthracite Coal Co. v. Adkins, 310 U.S. 381 (1940), and Oklahoma v. United States, 163 F.4th 294 (6th Cir. 2025): Cited to frame the notion that a private actor can operate “subordinately” to a government agency as an “aid,” mitigating nondelegation/Appointments concerns. Smith withdrew these challenges based on the SEC/FINRA position, leaving only statutory jurisdiction and the unexhausted constitutional objections.
  • Alpine Sec. Corp. v. FINRA, 121 F.4th 1314 (D.C. Cir. 2024) (Walker, J., concurring in the judgment in part and dissenting in part): Cited for a robust private-nondelegation critique of FINRA’s enforcement of federal-law-adjacent rules, contrasted with Sixth Circuit authority collecting cases approving the SRO model in Oklahoma.
  • United States v. Ackerman, 831 F.3d 1292 (10th Cir. 2016) (Gorsuch, J.): Cited for the intuition that “law enforcement powers” are typically governmental, helping frame Smith’s “private prosecution” narrative (even though the court ultimately treated the statutory text as dispositive).

C. Standard of review and administrative-law scaffolding

  • Jones Bros., Inc. v. Sec'y of Lab., 68 F.4th 289 (6th Cir. 2023) and KenAmerican Res., Inc. v. U.S. Sec'y of Lab., 33 F.4th 884 (6th Cir. 2022): Used to define “substantial evidence” review for agency factfinding.
  • Louisville Gas & Elec. Co. v. FERC, 988 F.3d 841 (6th Cir. 2021) (citing MISO Transmission Owners v. FERC, 860 F.3d 837 (6th Cir. 2017); Cincinnati Gas & Elec. Co. v. FERC, 724 F.2d 550 (6th Cir. 1984)): Used for de novo review of legal questions.

D. Exhaustion doctrine and its limits under § 78y(c)(1)

  • Island Creek Coal Co. v. Bryan, 937 F.3d 738 (6th Cir. 2019) and Singh v. Rosen, 984 F.3d 1142 (6th Cir. 2021) (quoting Ross v. Blake, 578 U.S. 632 (2016)): Used to emphasize that when exhaustion is statutory, courts may not create equitable excuses beyond the statute’s terms.
  • Axon Enters., Inc. v. FTC, 143 S. Ct. 890 (2023) and Free Enter. Fund v. PCAOB, 561 U.S. 477 (2010): Distinguished as addressing whether a party may bring certain structural challenges in district court before agency proceedings end; they did not excuse Smith’s choice to proceed within the SEC review pathway without raising the constitutional objection there.
  • Heating, Air Conditioning & Refrigeration Distribs. Int'l v. EPA, 71 F.4th 59 (D.C. Cir. 2023): Cited for the proposition that if litigants use the statutory review mechanism, they must comply with its exhaustion requirements.
  • Calcutt v. FDIC, 37 F.4th 293 (6th Cir. 2022), rev'd summarily, 143 S. Ct. 1317 (2023) (per curiam): Treated as inapposite because (as the majority described it) the case involved no statutory exhaustion requirement and a facial challenge—unlike Smith’s statutory exhaustion bar and as-applied Seventh Amendment claim.

E. Intervening-change-of-law and futility exceptions

  • Joseph Forrester Trucking v. Dir., Off. of Workers' Comp. Programs, 987 F.3d 581 (6th Cir. 2021) (citing Hormel v. Helvering, 312 U.S. 552 (1941)): Used to describe the limited “intervening change in law” concept and to reject Smith’s reliance on Jarkesy, particularly because Jarkesy said Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989), “effectively decides this case.”
  • Carr v. Saul, 141 S. Ct. 1352 (2021) (citing Bethesda Hosp. Ass'n v. Bowen, 485 U.S. 399 (1988); Mont. Nat'l Bank of Billings v. Yellowstone County, 276 U.S. 499 (1928)): Cited for futility principles, but the court emphasized that futility turns on an agency’s inability to grant relief, not on a prediction of likely loss.
  • Jones Bros., Inc. v. Sec'y of Lab., 898 F.3d 669 (6th Cir. 2018) (citing McCarthy v. Madigan, 503 U.S. 140 (1992)); Peabody Coal Co. v. Greer, 62 F.3d 801 (6th Cir. 1995): Used to cabin futility to “power to grant relief” and to stress agency-first reconsideration and efficiency rationales.

F. The (unreached) Seventh Amendment / Article III merits framework (discussed in dicta)

  • SEC v. Jarkesy, 144 S. Ct. 2117 (2024): The key decision animating Smith’s constitutional theory; the majority treated it as applying traditional Seventh Amendment analysis rather than changing the law.
  • Tull v. United States, 481 U.S. 412 (1987): Cited for the two-part Seventh Amendment test (historical analog + remedy characterization).
  • Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002): Cited for the legal/equitable restitution distinction (traceable funds vs personal liability).
  • Stern v. Marshall, 564 U.S. 462 (2011), and N. Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982): Used in dicta to frame private-rights adjudication limits outside Article III.

2) Legal Reasoning

A. Statutory jurisdiction: “associated with a member” captures control persons

The court resolved the jurisdictional question by reading together (i) FINRA’s statutory duty/power to discipline “members and persons associated with its members,” 15 U.S.C. § 78o-3(b)(7), and (ii) Congress’s definition of “person associated with a member,” which includes “any person directly or indirectly controlling” the member, 15 U.S.C. § 78c(a)(21).

That definition made Smith’s registration status largely irrelevant: FINRA did not need him to be a “member” if he qualified as a person “associated with” a member through control. The SEC’s unchallenged findings that Smith controlled CSSC (the parent) and functionally directed CSSC-BD’s business—including soliciting investors, directing registered representatives, and controlling hiring/firing and commissions—placed him within the statutory phrase’s core.

A notable move in the opinion is its refusal to convert Smith’s “consent” theory into a statutory limitation. Smith framed the regime as “a private organization enforcing the law against one who did not consent to its jurisdiction.” The court answered that Congress itself defined the jurisdictional reach to include control persons; any discomfort with private enforcement power sounds in constitutional doctrine (nondelegation/appointments), not in rewriting the jurisdictional text.

B. Exhaustion: § 78y(c)(1) bars unpresented objections absent “reasonable ground”

The decision’s main holding of broader administrative significance is its strict application of 15 U.S.C. § 78y(c)(1): courts may not consider objections to SEC orders unless they were “urged before the Commission” or the petitioner had “reasonable ground” for not doing so.

C. No “reasonable ground” existed on Smith’s three theories

  1. SEC “incompetence” to decide the claim: The court rejected the notion that the SEC could not entertain Seventh Amendment/structural objections, pointing to SEC decisions that did so (e.g., John Thomas Cap. Mgmt. Grp. LLC; Charles L. Hill, Jr.; Newport Coast Sec., Inc.). Axon Enters., Inc. v. FTC and Free Enter. Fund v. PCAOB were read as addressing a different question (district-court access midstream), not as eliminating exhaustion for those who choose the statutory review route.
  2. Intervening change in law via SEC v. Jarkesy: The court held Jarkesy was not an intervening change because it treated Granfinanciera, S.A. v. Nordberg as controlling. Additionally, even if Jarkesy mattered, Smith still could have alerted the Commission while his case remained pending by requesting supplemental briefing under 17 C.F.R. § 201.421(b) or seeking reconsideration under 17 C.F.R. § 201.470(b), and the SEC had entertained such requests in Ricky Alan Mantei.
  3. Futility: The court emphasized that futility concerns remedial power, not predicted outcome. Because the SEC could have vacated the FINRA sanctions and pursued enforcement in federal court (15 U.S.C. § 78u(d)), Smith could not claim the agency lacked power to provide relief if persuaded.

D. The majority’s dicta: why Smith’s unexhausted Jarkesy claim looked strong

Although the court deemed the constitutional claim unreviewable, it offered a detailed merits sketch:

  • Common-law analogue: Enforcement of § 10(b) and Rule 10b-5 closely resembles common-law fraud, paralleling SEC v. Jarkesy.
  • Legal vs equitable remedy: The restitution order appeared to impose personal liability without tracing specific funds and even contemplated payment to FINRA if victims could not be found—features the court viewed as “legal” rather than “equitable” under Great-West Life & Annuity Ins. Co. v. Knudson and consistent with Jarkesy’s skepticism about punitive/administrative “equitable” labels.
  • Public rights doctrine: The court suggested the “public rights” exception would not apply for similar reasons as Jarkesy, and it resisted the SEC’s appeal to historical “self-regulation” traditions because that tradition involved consenting members—an element Smith contested.

Judge Bloomekatz’s concurrence in the judgment objected to this extended discussion as improper dicta given § 78y(c)(1)’s command that unexhausted “objection[s]” may not be “considered by the court.”

3) Impact

A. Practical rule for SEC/FINRA respondents in the Sixth Circuit

  • Raise constitutional structure and jury-trial objections at the SEC—or likely lose them: The opinion makes clear that litigants who proceed through the SEC review pathway must “urge” their objections to the Commission, including Article III/Seventh Amendment objections, and must also timely alert the agency to new authority (via supplemental briefing or reconsideration).
  • Jarkesy is not a free pass around forfeiture: The court treated Jarkesy as an application of established doctrine, undermining “intervening change” excuses and encouraging early, repeated preservation.

B. Compliance and enforcement: control persons cannot “opt out” by refusing to register

On the statutory front, the decision strengthens FINRA’s ability to pursue discipline against individuals who functionally control member firms, even if those individuals attempt to remain formally unregistered. The “control” hook in 15 U.S.C. § 78c(a)(21) prevents jurisdictional avoidance through corporate layering or managerial informality.

C. Doctrinal pressure points going forward

  • Merits questions left open: The majority’s dicta and Judge Murphy’s “unconstitutional conditions” discussion preview future challenges to compelled SRO membership and internal adjudication after SEC v. Jarkesy.
  • Litigation strategy: Parties may increasingly (i) press Seventh Amendment objections before FINRA and the SEC, (ii) seek supplemental briefing immediately upon relevant Supreme Court decisions, and/or (iii) consider district-court structural suits under the theory-space discussed in Axon Enters., Inc. v. FTC, while still managing preservation under § 78y(c)(1) if they remain in the agency track.

Complex Concepts Simplified

  • SRO (Self-Regulatory Organization): A private membership entity (like FINRA) that writes and enforces industry rules under SEC oversight.
  • “Person associated with a member”: A statutory category that includes those who control a FINRA member, even if they are not registered representatives.
  • Exhaustion (15 U.S.C. § 78y(c)(1)): A rule that generally bars appellate courts from considering objections to SEC orders unless the party first presented those objections to the SEC (or had a statutorily acceptable reason not to).
  • Futility (in exhaustion law): Not “I would have lost,” but “the agency could not have granted the relief even if it agreed with me.”
  • Legal vs equitable restitution: Restitution can be “equitable” when it restores specific, traceable property; it is often “legal” when it imposes a general money judgment (personal liability) not tied to identifiable funds.
  • Public rights doctrine: A narrow doctrine allowing non-Article III adjudication for certain matters closely tied to governmental regulatory schemes; Jarkesy limited its use where the claim resembles common-law fraud and seeks legal remedies.

Conclusion

Eric Smith v. SEC establishes two consequential, practice-shaping points in the Sixth Circuit. First, FINRA’s statutory jurisdiction reaches beyond registered members to unregistered individuals who “directly or indirectly” control a member firm. Second, and more broadly, the Exchange Act’s exhaustion provision, 15 U.S.C. § 78y(c)(1), is a hard gatekeeper for constitutional objections to SEC orders: Jarkesy-based Article III and Seventh Amendment arguments must be presented to the SEC (and timely supplemented as the law evolves), or they will not be heard on petition for review. The concurrences underscore that the post-Jarkesy constitutional terrain remains unsettled—but this case signals that future litigants must preserve those questions early and explicitly if they want judicial answers.