Scottsdale Capital Advisors Corp. v. Fin. Indus. Regulatory Auth., Inc.

Decision Date20 December 2016
Docket NumberNo. 16-1497,16-1497
Citation844 F.3d 414
Parties SCOTTSDALE CAPITAL ADVISORS CORPORATION; John J. Hurry; Timothy B. Diblasi; Darrel Michael Cruz, Plaintiffs–Appellants, v. FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC., Defendant–Appellee. Securities and Exchange Commission, Amicus Supporting Appellee.
CourtU.S. Court of Appeals — Fourth Circuit

ARGUED: Jonathan S. Franklin, NORTON ROSE FULBRIGHT US LLP, Washington, D.C., for Appellants. Timothy Wilson Mountz, FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC., Washington, D.C., for Appellee. Martin V. Totaro, SECURITIES AND EXCHANGE COMMISSION, Washington, D.C., for Amicus Curiae. ON BRIEF: John W. Akin, NORTON ROSE FULBRIGHT US LLP, Washington, D.C., for Appellants. Terri L. Reicher, Office of General Counsel, FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC., Washington, D.C., for Appellee. Anne K. Small, General Counsel, Sanket J. Bulsara, Deputy General Counsel, Michael A. Conley, Solicitor, Dominick V. Freda, Senior Litigation Counsel, Josephine T. Morse, Office of the General Counsel, SECURITIES AND EXCHANGE COMMISSION, Washington, D.C., for Amicus Curiae.

Before MOTZ, KING, and DUNCAN, Circuit Judges.

Affirmed by published opinion. Judge Duncan wrote the opinion, in which Judge Motz and Judge King joined.

DUNCAN, Circuit Judge:

Scottsdale Capital Advisors Corporation and three of its current and former officers (collectively, "Scottsdale") are respondents in an ongoing disciplinary proceeding before the Financial Industry Regulatory Authority, Inc. ("FINRA") for allegedly selling unregistered securities in violation of Section 5 of the Securities Act of 1933, 15 U.S.C. § 77e ("Securities Act") and FINRA Rule 2010. Before FINRA completed its proceedings, Scottsdale sought an injunction in federal district court, claiming the FINRA proceeding is unauthorized because FINRA may only discipline members for violations of the Securities Exchange Act of 1934, 15 U.S.C. § 78a, et seq. ("Exchange Act"). The district court dismissed for lack of subject-matter jurisdiction and Scottsdale appeals. For the reasons that follow, we affirm.

I.
A.

Congress, through the Exchange Act, delegated the power to register national securities associations ("RSAs" or "associations") to the Securities and Exchange Commission ("SEC"). Pursuant to this authority, the SEC registered FINRA as an RSA.1 FINRA, comprised of financial brokers and dealers, promulgates rules to enforce broker-dealer compliance with the Exchange Act, "the rules and regulations thereunder ... and the rules of the association." 15 U.S.C. § 78o-3(b)(2).

Despite FINRA's seemingly broad power, Congress mandated that the SEC exercise close supervision over the association. Before any FINRA rule goes into effect, the SEC must approve the rule and specifically determine that it is consistent with the purposes of the Exchange Act. Id.§§ 78o-3(b)(6), 78s(b)(2)(C). The SEC may also amend any existing rule to ensure it comports with the purposes and requirements of the Exchange Act. Id.§ 78s (b)(1), (c).

B.

The Exchange Act sets out the process by which FINRA may initiate disciplinary proceedings, which is codified in FINRA's Code of Procedure. 15 U.S.C. § 78o-3(h) ; FINRA Rule 9000, et seq.2 When FINRA believes a member has violated "any rule, regulation, or statutory provision, including the federal securities laws and the regulations thereunder," FINRA Rule 9211, it begins a disciplinary proceeding by filing a complaint against the member. Id. 9212. If the respondent requests, FINRA will hold a hearing, after which a Hearing Panel will issue a written decision. Id. 9221, 9268. The respondent or FINRA may appeal the Hearing Panel's decision to the National Adjudicatory Council ("NAC"), a FINRA committee. Id. 9311. An appeal to the NAC acts as a stay of the Hearing Panel's decision. Id. 9311(b). The NAC may affirm, modify, reverse, dismiss, or remand the Hearing Panel's decision. Id. 9349(a). The NAC's decision (or the Hearing Panel's decision if there was no appeal) is FINRA's final action unless FINRA's Board of Governors calls for review. Id. 9351.

Review of final FINRA action invokes the SEC's role under the Exchange Act in overseeing FINRA's authority to discipline members. FINRA must "promptly file notice" with the SEC when it "imposes any final disciplinary sanction" on any member and FINRA members may appeal adverse final FINRA actions to the SEC for review. 15 U.S.C. § 78s(d)(1), (2). An appeal to the SEC "shall stay the effectiveness of any sanction, other than a bar or an expulsion." FINRA Rule 9370(a). The SEC, upon its own motion or by appeal from the member, "shall" then review FINRA's decision to ensure any rule allegedly violated was "applied in a manner[ ] consistent with the purposes" of the Exchange Act. 15 U.S.C. § 78s(e)(1)(A). The SEC can affirm, modify, or set aside FINRA's decision or remand for further proceedings. Id.§ 78s(e)(1). If, after SEC review, a party remains "aggrieved," it "may obtain review" of the SEC's final order in the appropriate court of appeals. Id.§ 78y(a)(1); see also Bennett v. SEC, No. 15–2584, slip op. at 3 (argued Oct. 28, 2016). With this judicial-review scheme in mind, we turn to the FINRA proceeding at issue here.

C.

On May 15, 2015, FINRA initiated a disciplinary proceeding against Scottsdale, alleging it had liquidated over 74 million shares of unregistered stocks in violation of Section 5 of the Securities Act, 15 U.S.C. § 77e(a). According to FINRA's complaint, Scottsdale's violation of the Securities Act also violated FINRA Rule 2010, which requires members to "observe high standards of commercial honor and just and equitable principles of trade." FINRA Rule 2010. Scottsdale filed a motion for summary disposition with the FINRA Hearing Panel, alleging, inter alia, that FINRA did not have jurisdiction to bring the proceeding because it can only charge violations of the Exchange Act, not the Securities Act. The Hearing Panel denied the motion and scheduled a hearing for June 13–24, 2016.

Scottsdale then filed for declaratory and injunctive relief in the United States District Court for the District of Maryland, alleging, as it had before FINRA, that the disciplinary proceeding was ultra vires. FINRA filed a motion to dismiss for lack of subject-matter jurisdiction and failure to state a claim.

On April 26, 2016, the district court held a hearing on the motion to dismiss. Assuming without deciding that Scottsdale had a cause of action under the Exchange Act, the district court nonetheless found it "clear" that "Congress intended to channel judicial review through th[e] comprehensive scheme" found in 15 U.S.C. §§ 78s and 78y. J.A. 176. "The question of whether the ... FINRA rules that are involved here are within their authority and appropriate," the district court reasoned, is "clearly within" the review scheme outlined in the Exchange Act. J.A. 176–77. The district court relied on Thunder Basin Coal Company v. Reich, 510 U.S. 200, 114 S.Ct. 771, 127 L.Ed.2d 29 (1994), to dismiss the complaint, finding it "beyond the subject matter jurisdiction" of the court to consider a challenge "to the ongoing disciplinary proceeding." J.A. 178. Scottsdale appeals.

II.
A.

Scottsdale argues FINRA exceeded its authority by charging it with violations of the Securities Act and, therefore, the proceeding is ultra vires. FINRA counters that, as a threshold matter, Scottsdale must first press its claim through the administrative process and then seek review in the appropriate court of appeals. We review a district court's dismissal of a complaint for lack of subject-matter jurisdiction de novo. Nat'l Taxpayers Union v. U.S. Soc. Sec. Admin., 376 F.3d 239, 241 (4th Cir. 2004).

B.

Article III courts are "courts of limited jurisdiction," possessing "only that power authorized by Constitution and statute." Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377, 114 S.Ct. 1673, 128 L.Ed.2d 391 (1994). "Congress may, in its discretion, grant, withhold, or otherwise limit the jurisdiction of the lower federal courts." Wade v. Blue, 369 F.3d 407, 410 (4th Cir. 2004). We are bound by those limitations unless they offend the Constitution. SeeBowles v. Russell, 551 U.S. 205, 212, 127 S.Ct. 2360, 168 L.Ed.2d 96 (2007).

Notwithstanding the exclusive grant of jurisdiction to the courts of appeals in the Exchange Act, Scottsdale argues the district court had jurisdiction to consider its claim because FINRA lacked authority to initiate the disciplinary proceeding. Scottsdale believes it need not, as it describes it, exhaust administrative remedies before seeking review in this court for two reasons.3 First, Scottsdale claims the limited exception to jurisdiction-stripping recognized in Leedom v. Kyne, 358 U.S. 184, 79 S.Ct. 180, 3 L.Ed.2d 210 (1958), applies because FINRA is allegedly acting outside of its statutory authority. Alternatively, Scottsdale asserts its claim is not of the type Congress intended to remove from district court jurisdiction under the framework articulated in Thunder Basin. We discuss each claim in turn.

C.
1.

Scottsdale first argues the district court had jurisdiction under Leedom.Leedom involved a challenge to the National Labor Relations Board's ("NLRB") decision—in direct violation of the National Labor Relations Act ("NLRA")—to include both professional and nonprofessional employees in a collective bargaining unit. 358 U.S. at 184–86, 79 S.Ct. 180. Before the Court, the NLRB conceded that it "had acted in excess of its powers and had thereby worked injury to the statutory rights" of the petitioners. Id. at 187, 79 S.Ct. 180. Even though the NLRA precluded district court jurisdiction of such an action, the Supreme Court held that the district court had jurisdiction because the NLRB had acted "in excess of its delegated powers and contrary to a specific prohibition in the Act."4 Id. at 188, 79 S.Ct. 180 (emphasis added). In such a case, the Court...

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