MEMORANDUM OPINION
CHRISTOPHER R. COOPER, UNITED STATES DISTRICT JUDGE.
Jack
Dempsey once observed that “the best defense is a good
offense.” In boxing, perhaps, but not always in
litigation. This case proves the point.
For the
past decade, Arizona-based securities brokerage Scottsdale
Capital Advisors has been in the cross-hairs of its
regulator, the Financial Industry Regulatory Authority
(“FINRA”). FINRA has fined, sanctioned, and
censured Scottsdale and its officers multiple times for a
host of violations involving Scottsdale's dealings in
unregistered penny stocks. Scottsdale has vigorously defended
itself against these actions, complaining that FINRA has
unfairly targeted its segment of the securities industry. It
has also gone on offense by suing FINRA in federal court. Its
most recent suit failed in the District Court for the
District of Maryland and then at the Fourth Circuit Court of
Appeals for lack of subject-matter jurisdiction. Scottsdale
now turns to this Court.
Scottsdale's
newest claim is not a precise mirror of its previous one.
Here, it sues FINRA for alleged breaches of the membership
agreement Scottsdale entered when joining the organization.
But while Scottsdale brings an ostensible breach of contract
claim, this Court's jurisdiction turns on the substance
of that claim rather than the label affixed to it. Examining
the substance, Scottsdale's allegations are all
intertwined with FINRA's governance and regulatory
decisions, which Congress has mandated be challenged
administratively and reviewed by appellate courts. So,
different label, same result: This Court lacks the power to
hear Scottsdale's claims and will dismiss the case in its
entirety.
I.
Background
A.
Regulatory Background
The
Securities Exchange Act of 1934 (“Exchange Act”)
authorizes the Securities and Exchange Commission
(“SEC”) to register self-regulatory organizations
(“SROs”). See 15 U.S.C. § 78o-3(a).
Pursuant to that authority, the SEC registered FINRA, a
non-profit membership corporation comprised of financial
brokers and dealers.[1] FINRA “promulgates rules to enforce
broker-dealer compliance with the Exchange Act, ‘the
rules and regulations thereunder . . . and the rules of the
association.'” Scottsdale Capital Advisors
Corp. v. FINRA (“Scottsdale I”),
844 F.3d 414, 417-18 (4th Cir. 2016) (quoting 15 U.S.C.
§ 78o-3(b)(2)). FINRA “must maintain rules that .
. . ‘remove impediments to . . . a free and open market
and a national market system, and . . . protect investors and
the public interest,' while permitting neither
‘unfair discrimination between customers, issuers,
brokers, or dealers' . . . nor the imposition of
‘any burden upon competition not necessary or
appropriate in furtherance of the purposes' of the
Act.” Domestic Secs., Inc. v. SEC, 333 F.3d
239, 242 (D.C. Cir. 2003) (quoting 15 U.S.C. §
78o-3(b)(6), (9)). All rules promulgated by FINRA must be
approved by the SEC and must be consistent with the Exchange
Act. 15 U.S.C. §§ 78o-3(b)(6), 78s(b)(2)(C). The
SEC also has power to amend any existing FINRA rule to ensure
that it comports with the purposes and requirements of the
Exchange Act. Id. § 78s(b)(1), (c).
FINRA
also has enforcement powers. It operates as a
“‘quasi-governmental agency' authorized
‘to adjudicate actions against members who are accused
of illegal securities practices and to sanction members found
to have violated the Exchange Act or . . . [SEC] regulations
issued pursuant thereto.'” North v. Smarsh,
Inc., 160 F.Supp.3d 63, 72 (D.D.C. 2015) (quoting
NASD v. SEC, 431 F.3d 803, 804 (D.C. Cir. 2005))
(alteration in original). When FINRA believes a member has
violated any of its rules, it can initiate a disciplinary
proceeding against the member through a Hearing Panel and
impose sanctions on violators. See 15 U.S.C. §
78o-3(h).
The
Exchange Act also sets out the process by which members can
challenge FINRA's disciplinary decisions. First, a member
firm can appeal a FINRA Hearing Panel decision to the
National Adjudicatory Council (“NAC”), a FINRA
Committee. North, 160 F.Supp.3d at 72. The NAC can
affirm, modify, or reverse a decision. Id. If the
NAC affirms a FINRA decision, the member firm can file an
Application for Review of the decision with the SEC.
See 15 U.S.C. § 78s(d). If the SEC affirms that
decision, member firms still have one final option: appeal to
the appropriate circuit court of appeals. See id.
§ 78y(b).
B.
Scottsdale's Allegations
The
following allegations are drawn from Scottsdale's
Complaint. As it must at this stage in the litigation, the
Court assumes the truth of well-pleaded factual allegations,
though it need not accept a plaintiff's legal
conclusions. See, e.g., Am. Nat'l Ins. Co.
v. FDIC, 642 F.3d 1137, 1139 (D.C. Cir. 2011) (citations
omitted). “Virtually all firms in the purchase and sale
of securities must be members of FINRA.”
Compl. ¶ 15. Scottsdale, as one such firm, has been a
member of FINRA since 2002. Id. ¶ 7. When it
joined, Scottsdale entered into FINRA's standard
membership agreement. Id. ¶ 28. FINRA describes
the membership agreement as a “contractual relationship
between [a member] and FINRA.” Id. (citation
omitted). FINRA's ByLaws are incorporated into the
membership agreement, which expressly requires compliance
with those By-Laws. Id. ¶ 29.
Scottsdale
alleges that FINRA has violated its By-Laws and the Exchange
Act in several ways. First, the composition of its board. The
Exchange Act requires that FINRA “assure fair
representation of its members” and “not impose
any burden on competition not necessary or appropriate in
furtherance of the purposes of” the Act. 15 U.S.C.
§ 78o-3(b)(4), (9); see Compl. ¶ 31.
Scottsdale contends that FINRA has violated this covenant by
permitting members to elect only seven of its twenty-three
governors. Compl. ¶ 34. Aggravating that situation,
according to Scottsdale, is the fact that only three of those
seven seats can be filled by governors from “small
firms” like Scottsdale. Id.
Second,
the use of internal guidance. Scottsdale alleges that FINRA
has promulgated guidance containing its interpretation of SEC
rules and regulations as well as federal statutes.
Id. ¶ 38; see also id. ¶ 39
(including example in which FINRA guidance “directly
target[ed] transactions involving microcap and low-priced
securities”). Per Scottsdale, this guidance is not
issued pursuant to the procedures articulated in FINRA's
By-Laws, nor does it conform to the requirements of the
Exchange Act. Id. ¶ 38. Nevertheless,
Scottsdale claims, FINRA has taken the view that the guidance
is binding on its members, with disciplinary consequences for
failure to comply. Id. Scottsdale offers several
examples where FINRA has “wielded this guidance against
its members, ” id. ¶ 41, pursuing
disciplinary actions “based on its dim view of the
microcap and low-priced securities market segment, ”
id. ¶ 42. As Scottsdale frames it,
“FINRA's crusade against the microcap and
low-priced securities market has directly impacted
Scottsdale, which engages in that industry.”
Id. ¶ 48. Specifically, it complains that FINRA
has targeted it for “examinations, extensive document
requests, and prosecutions, and sought to levy fines against
it for its day-to-day business activities.”
Id.
Third,
ultra vires enforcement. Scottsdale alleges that
FINRA has engaged in improper enforcement of FINRA Rule 2010.
See id. ¶¶ 52-61. That rule provides that
each FINRA member “in the conduct of its business[]
shall observe high standards of commercial honor and just and
equitable principles of trade.” FINRA R. 2010; see
also Compl. ¶ 52. The SEC approved that rule in
2008 on the basis of Section 15A(b)(6) of the Exchange Act,
which requires SROs to “promote just and equitable
principles of trade.” Compl. ¶ 53. The Complaint
alleges that, in disciplinary proceedings against Scottsdale,
FINRA “propounded a contrary interpretation of FINRA
Rule 2010” when it accused Scottsdale of violating not
the 1934 Exchange Act, but a section of the ...