The U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) can relax after a federal judge in Philadelphia refused to block a disciplinary hearing against a broker who argued that the proceeding violated his Seventh Amendment right to a jury trial.
In June, the U.S. Supreme Court ruled in SEC v. Jarkesy that the Seventh Amendment prevents SEC administrative law judges from overseeing enforcement actions seeking civil penalties. This decision has already started to impact the SEC and other federal agencies. Comcast, for example, filed a lawsuit against the U.S. Department of Labor, citing Jarkesy as a precedent that bars a Labor Department administrative law judge from hearing a whistleblower case. Perdue Farms followed suit with a similar lawsuit.
Following the Jarkesy ruling, the SEC quietly dismissed eight enforcement actions overseen by administrative law judges, according to a Reuters report. The SEC did not offer any explanation for the dismissals, but legal experts believe the Supreme Court’s decision likely prompted the move. All of these cases involved misconduct allegations against accountants.
Meanwhile, a Pennsylvania broker named Allen Blankenship is making a similar argument in a lawsuit. Blankenship lost his job at Independent Financial Group in 2019, and FINRA accused him in 2023 of “unsuitable mutual fund trading” to boost his commissions. Blankenship denied the accusations but initially did not raise constitutional arguments. However, after the Supreme Court’s Jarkesy decision, Blankenship’s lawyers argued that FINRA’s allegations, like the SEC’s claims against Jarkesy, resembled common-law fraud, and therefore, Blankenship was entitled to a jury trial.
Blankenship’s lawyers also cited the Supreme Court’s 2023 Axon v. U.S. Federal Trade Commission ruling, arguing that he should be able to resolve his constitutional challenge before FINRA’s disciplinary hearing takes place. FINRA’s legal team, represented by Gibson, Dunn & Crutcher, countered by arguing that Blankenship’s case does not belong in federal court at this stage. They pointed to the Supreme Court’s 1994 Thunder Basin Coal v. Reich ruling, which holds that when Congress establishes a comprehensive agency enforcement structure, defendants cannot go to court until the agency issues a final determination.
FINRA’s lawyers also argued that Blankenship’s challenge fails on the merits because FINRA is a private organization, not a federal agency. Blankenship agreed to follow FINRA’s procedures when he registered as a broker.
U.S. District Judge John Murphy agreed with FINRA’s argument and ruled that Blankenship must wait until his hearing concludes and he exhausts his administrative options before seeking judicial review. Judge Murphy noted that Axon does not apply in this case, as FINRA might change its approach or Blankenship could prevail in the hearing. He concluded that the court lacks jurisdiction at this stage.
Blankenship’s lawyer, Dochtor Kennedy, has not yet decided whether to appeal the ruling but expressed disappointment that Blankenship must endure the entire FINRA process before challenging the SEC. Kennedy suggested that once they reach the SEC, they will be in a strong position to challenge the Commission’s authority.
