Securities Regulation Daily Wrap Up, ENFORCEMENT—U.S.: Cert petition asks Court to resolve post-Jarkesy split on issue exhaustion, (Oct 20, 2026)

By Rodney F. Tonkovic, J.D.

Is the issue-exhaustion requirement satisfied if presenting the claim would be "clearly useless?"

A respondent in a FINRA disciplinary action has asked the Supreme Court to weigh in on whether statutory issue-exhaustion requirements bar courts from hearing structural constitutional challenges to agency proceedings. The petition argues that the Sixth Circuit wrongly refused to consider his claim that the SEC's imposition of monetary sanctions violated his Seventh Amendment right to a jury trial, The petition asks whether structural constitutional claims must be raised before the agency to preserve judicial review, and whether exhaustion is excused when raising the claim would have been clearly useless, or only when the agency lacks power to grant relief (Petition for a Writ of Certiorari, Smith v. SEC, No. 26-514 (Oct. 16, 2026)).

CSSC. Petitioner Eric Smith is the founder and CEO of Consulting Services Support Corporation (CSSC). The corporate structure included a registered FINRA broker-dealer. Smith initially maintained that he was not actively engaged in in the broker-dealer's business, but as time went on, he took a more active role. Eventually FINRA filed a complaint, and in the ensuing disciplinary proceeding, Smith was found to have violated Rule 10b-5 and was barred from association and ordered to pay $13,000 in restitution. The SEC affirmed.

Smith appealed, arguing that FINRA lacked jurisdiction over him. The Sixth Circuit disagreed, concluding that FINRA had statutory jurisdiction over Smith because the Exchange Act permits FINRA to discipline persons associated with member firms, including persons who directly or indirectly control a member. But the court declined to decide his Article III and Seventh Amendment arguments because he had not presented them to the SEC as required by the exhaustion requirement in Exchange Act Section 25(c)(1) (15 U.S.C. § 78y(c)(1)).

Issue-exhaustion. Smith's petition argues that the Sixth Circuit's ruling in his case adds to a circuit split on the issue of whether mandatory issue-exhaustion statutes apply to structural constitutional claims (the right to a jury trial, specifically) challenging the inherent nature of the proceeding itself. The Ninth and Third have held that these statutes do not limit a courts power to review such claims. The Second, Fifth, Eighth, Tenth, D.C., and now the Sixth Circuits treat statutory exhaustion provisions as controlling. This division is sharp, the petition says: if this case had arisen in the Ninth Circuit, the outcome would be different, and only the Court can resolve this split.

Futility. There is also a split on the issue of futility. All circuits recognize that Section 25(c)(1) excuses the failure to exhaust a claim if there is a reasonable ground. But there is a split on what the party must show to establish futility. The 10th and D.C. Circuits employ a "clearly useless" standard satisfied if there is a settled agency position denying the objection.

The Sixth Circuit, however, requires that an agency must be "powerless to grant the relief requested." As the petition explains, the SEC has consistently rejected Seventh Amendment claims like the one here, but since it has the "power" to reconsider that position, the Sixth Circuit held that the claim was barred. Smith had argued that raising the objection before the SEC would have been useless: " The claim was beaten dead by the SEC—which is exactly why Smith needed an Article III court."

Jarkesy. The petition notes in particular that the Sixth Circuit acknowledged that Smith's Seventh Amendment jury trial claim would probably have merit under Jarkesy, but that it was unable to hear it because Smith had not raised the issue before the Commission and lacked a reasonable ground for failing to do so. Smith argued that the SEC lacked competence to resolve a constitutional claim challenging the inherent nature of its proceedings, and had repeatedly rejected jury-trial objections in prior cases. If the Sixth Circuit's decision stands, it will wrongfully shield unconstitutional agency proceedings from judicial review, the petition says.

The Case is No. 26-514.

Attorneys: Gregory George Garre (Latham & Watkins LLP) for Eric Smith. D. John Sauer, United States Department of Justice, for the SEC.

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