On February 26, 2021, in Springsteen-Abbott v. Securities and Exchange Commission,¹ a panel of the U.S. Court of Appeals for the D.C. Circuit held that a petitioner challenging sanctions imposed by the Financial Institutions Regulatory Authority (FINRA) and upheld by the Securities and Exchange Commission (SEC) had forfeited her constitutional arguments by failing to raise them before the Commission. In reaching its conclusion, the Court specifically noted the “rather puzzling” trend of forfeiture of constitutional arguments in cases arising from agency proceedings. The Court specifically urged parties and specialized agency counsel to consult appellate experts during proceedings before agencies. The case demonstrates the importance of anticipating future litigation from the outset of administrative adjudications or rulemakings. It also highlights the benefits of retaining counsel that specializes in statutory and constitutional law well before a case is in front of an appellate court, including in proceedings before an agency. 

Case Background

In 2011, FINRA initiated an investigation into Petitioner Kimberly Springsteen-Abbott—the CEO of two related securities companies—based on tips that she had been improperly allocating personal expenses to her businesses. FINRA ultimately found that Springsteen-Abbott had improperly assigned over $200,000 in charges to investor funds in violation of FINRA Rule 2010, which requires members to “observe high standards of commercial honor and just and equitable principles of trade.” It accordingly barred her from the securities industry and imposed fines and disgorgement. Springsteen-Abbott appealed the decision to the SEC, and the SEC sustained the industry bar and disgorgement but set aside her fine. Springsteen-Abbott next filed a petition under 15 U.S.C. § 78y(a)(1) challenging the SEC’s order before the D.C. Circuit.

Springsteen-Abbott asserted that FINRA is a state actor and that its adjudication violated the Appointments Clause and Due Process Clause. The Court declined to address those constitutional arguments, however, because she had not raised them before the SEC. The Court relied on the Securities Exchange Act of 1934’s administrative exhaustion requirement, set forth at 15 U.S.C. § 78y(c)(1), which provides that “[n]o objection to an order or rule of the Commission . . . may be considered by the court unless it was urged before the Commission or there was reasonable ground for failure to do so.” The Court explained that “Congress has prohibited [it] from considering issues not raised before the SEC.” 

The Court recognized that raising Springsteen-Abbott’s constitutional arguments before the Commission would likely have been futile, as regulatory agencies lack authority to declare an act of Congress unconstitutional. It noted that “[t]here may have been a good argument” that § 78y(c)(1)’s exhaustion requirement “does not apply to constitutional challenges to a statute” or that there was “reasonable ground” for Petitioner not to urge such a challenge before the Commission. But the Court found those arguments foreclosed by its prior decision in Jarkesy v. SEC.² In Jarkesy, the Court interpreted the Securities Exchange Act’s judicial review provision in the context of a collateral constitutional challenge to a pending SEC securities fraud proceeding. The Jarkesy panel held that the Act’s provision permitting petitions for judicial review of SEC final orders was exclusive. The panel there rejected the petitioner’s argument that bringing his claims before the Commission would be futile, explaining that “so long as a court can eventually pass upon the challenge, limits on an agency’s own ability to make definitive pronouncements about a statute’s constitutionality do not preclude requiring the challenge to go through the administrative route.” Id. at 18. Applying that reasoning, the Springsteen-Abbott court concluded that futility could not excuse Springsteen-Abbott’s failure to press her constitutional claims before the SEC directly. 

After quickly rejecting Petitioner’s remaining statutory arguments, the Court issued an unusual, but important, warning regarding agency proceedings: 

It’s rather puzzling that so many cases of alleged forfeiture of constitutional arguments before an agency have arisen recently all across the country. These cases cause needless disputes at the threshold of judicial review of agency action. The “specialized bar” should take care to either stay up to date on broad appellate legal trends or consult those who do.

Key Takeaways

The D.C. Circuit’s decision is consistent with an emerging trend across circuits holding, rightly or wrongly, that constitutional arguments are often not exempt from administrative exhaustion rules—regardless of whether an agency had authority to award relief under the relevant constitutional claim. This trend, as well as the D.C. Circuit’s opinion, underscores the importance of identifying and preserving all viable constitutional and statutory claims throughout agency proceedings in contemplation of eventual federal court litigation. As the panel’s call to action points out, administrative-law and appellate litigators who focus on these types of issues are often best positioned to evaluate these arguments at each stage of an administrative proceeding, including adjudications and rulemakings. These attorneys are steeped in developments in constitutional law and statutory interpretation and will help assess the relevant agency action in the context of recent and pending cases in courts across the country. This expertise can make administrative-law or appellate counsel critical partners to subject-matter specialists from the outset of administrative proceedings.