Next month, the Fourth Circuit will consider a legal argument that could help patch the hole ripped open by the Supreme Court in SEC v. Jarkesy.

Jarkesy held that agencies seeking to impose monetary penalties on enforcement targets for securities fraud and other common law-ish claims must proceed in federal court, not their own administrative forums. The Fourth Circuit case, Black v. SEC, is one of many Jarkesy-based challenges raised by agency enforcement targets since that controversial decision was issued last summer.

Frank Black was the President, CEO, and owner of a North Carolina securities broker that faced an administrative disciplinary proceeding brought by the Financial Industry Regulatory Authority (FINRA) for record-keeping failures. FINRA’s Hearing Panel found Black liable and its National Adjudicatory Council affirmed and imposed a monetary fine. The SEC affirmed.

Now represented by the Pacific Legal Foundation, Black is asking the Fourth Circuit to find that the FINRA proceedings violated his constitutional rights under Jarkesy.

FINRA’s response is simple – but has big consequences. FINRA argues that when Black’s brokerage became a FINRA “member,” it prospectively consented to FINRA’s administrative jurisdiction for any future disciplinary proceedings. The brief (authored by Gibson Dunn) argues that “even if Article III and the Seventh Amendment would otherwise apply to FINRA disciplinary proceedings, FINRA members and associated persons have voluntarily agreed to participate in those proceedings and thus relinquished any right they might have to a jury trial in federal court.” 

FINRA also has advanced the consent theory to beat back another Jarkesy challenge, arguing in that earlier case that the plaintiff “knowingly relinquished any right he might otherwise have had to defend himself against FINRA’s allegations before a jury in federal court” when he “affirmatively registered with FINRA.” (That case ended up being decided on other grounds.)

“Registration-as-consent” creates a powerful Jarkesy shield – one that may offer constitutional protection for other administrative proceedings against licensees, including SEC enforcement actions against registered persons.

The theory rests on solid constitutional ground. The Court has consistently recognized and upheld similar consent to otherwise unconstitutional adjudications in cases such as Mallory v. Norfolk Southern, Thomas v. Union Carbide, Wellness Int’l v. Sharif, and CFTC v. Schor. And the Second and Seventh Circuit have similarly rejected constitutional challenges to New York Stock Exchange disciplinary proceedings on the basis that defendants had prospectively consented to such proceedings by becoming NYSE members.

The consent solution to Jarkesy invites courts to skip over thorny questions – like whether the agency’s claims are sufficiently analogous to common law actions – and instead decide cases on the cleaner logic that parties get what they bargained for.

If successful, the consent theory could substantially insulate the SEC from Jarkesy’s fallout. SEC registrants take on a host of burdens in exchange for this license to do business, including (potentially) exposure to the SEC’s administrative jurisdiction. The question was left open by Jarkesy because Jarkesy’s hedge fund was not registered.

SEC registrants arguably have already implicitly consented to SEC administrative adjudication. If not, SEC could make it so with simple interpretive guidance or by amending a few regulatory forms. 

If Jarkesy only strips the SEC of its ability to pursue administrative enforcement actions for fraud-related misconduct seeking monetary penalties against unregistered parties, this would limit Jarkesy’s impact to about 5% of the SEC’s FY 2021 and 2023 enforcement dockets.

Black v. SEC could be the first legal test of the “registration-as-consent” theory in the post-Jarkesy era. It is unlikely to be the last word. The Fourth Circuit will hear oral arguments December 10.

For more, see “Registration as Consent: Patching Jarkesy’s Hole in SEC Enforcement,” available here and forthcoming in Volume 100 of the Notre Dame Law Review Reflection.

Alex Platt is Associate Professor at the University of Kansas School of Law. Send comments to alex.platt@ku.edu.