*74Brian Lanciault, Pro Hac Vice, Maranda E. Fritz, Pro Hac Vice, Thompson
Hine LLP, New York, NY, Joseph Andrew Smith, Thompson Hine LLP, Washington, DC,
for Plaintiff., Terri L. Reicher, Financial Industry Regulatory Authority, Inc.
Office of General Counsel, Washington, DC, for Defendant., 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., 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)., 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 *77Exchange 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., These actions,
Scottsdale says, stifle its business and violate the membership agreement, which
functions as a contract between the parties. As a result, it claims it has lost
revenue and seeks damages. See Compl. ¶¶ 5-6; id. Prayer for Relief ¶ 2., *78Two
days after filing this case, a Scottsdale affiliate, owned by the same person, petitioned
the SEC for a rulemaking. See MTD Ex. B. That petition discusses many of the same
concerns that Scottsdale raises in this suit regarding the consequences of FINRA's
structure and regulatory actions for microcap securities firms. It specifically
asks for reforms to the process by which FINRA nominates and elects its Board of
Governors, seeking a greater number of "Industry representatives." See id. at 13-14.
It also asks the Commission to "prevent the further improper issuance and use of
'guidance,' " id. at 13, citing the same guidance Scottsdale challenges in this
suit, id. at 9-10., Federal courts are courts of limited jurisdiction and the law
presumes that "a cause lies outside this limited jurisdiction." Kokkonen v. Guardian
Life Ins. Co. of Am., 511 U.S. 375, 377, 114 S.Ct. 1673, 128 L.Ed.2d 391 (1994)
(citation omitted). FINRA has moved to dismiss the case for lack of subject-matter
jurisdiction under Federal Rule of Civil Procedure 12(b)(1).3 To defeat a 12(b)(1)
motion, a plaintiff must show "by a preponderance of the evidence that the Court
has subject matter jurisdiction[.]" Biton v. Palestinian Interim Self-Gov't Auth.,
310 F. Supp. 2d 172, 176 (D.D.C. 2004). When analyzing a motion to dismiss under
Rule 12(b)(1) the Court "assume[s] the truth of all material factual allegations
in the complaint and construe[s] the complaint liberally, granting plaintiff the
benefit of all inferences that can be derived from the facts alleged." Am. Nat'l
Ins. Co., 642 F.3d at 1139 (citations omitted). The Court "may consider materials
outside the pleadings in deciding whether to grant a motion to dismiss for lack
of jurisdiction." Jerome Stevens Pharm., 402 F.3d at 1253 (citation omitted)., In
Thunder Basin, the Supreme Court established a two-part "framework for determining
when a statutory scheme of administrative and judicial review forecloses parallel
district-court jurisdiction." Id. at 12. Courts consider whether "Congress intended
that a litigant proceed exclusively through a statutory scheme of administrative
and judicial review" by looking first to whether "such intent is 'fairly discernible
in the statutory scheme.' " Id. at 15 (quoting Thunder Basin, 510 U.S. at 212,
114 S.Ct. 771 ) (alteration in original). If congressional intent is apparent, courts
must then look to whether "the litigant's claims are 'of the type Congress intended
to be reviewed within [the] statutory structure.' " Id. (quoting Thunder Basin,
510 U.S. at 212, 114 S.Ct. 771 )., Scottsdale does not seem to dispute that the
first part of the Thunder Basin framework is met. See Opp'n at 7-8 (contending
that Exchange Act's review process does not preclude Scottsdale's claims, but
not disputing Congress's intent to create an administrative review scheme). Nor
can it. In Jarkesy v. SEC, the D.C. Circuit applied the Thunder Basin framework
to the Exchange Act in a suit challenging an SEC enforcement action. It held that
" '[g]iven the painstaking detail with which' Congress set forth the rules governing
the court of appeals' review of Commission action, 'it is fairly discernible that
Congress intended to deny [aggrieved respondents] an additional avenue of review
in district court.' " Jarkesy, 803 F.3d at 17. While Jarkesy dealt with SEC action,
courts elsewhere have consistently held that FINRA and other SRO actions, too, fall
within the scope of the Exchange Act's exclusive scheme. See, e.g., City of Providence,
Rhode Island v. BATS Glob. Mkts., Inc., 878 F.3d 36, 44 (2d Cir. 2017), cert. denied
--- U.S. ----, 139 S. Ct. 341, 202 L.Ed.2d 255 (2018) ("Plainly, Congress created
a detailed scheme of administrative and judicial review for challenges to certain
actions of SROs. For example, a party who objects to an SRO's disciplinary action
or rule must raise its objection under the exclusive review scheme Congress devised
for such challenges and not in an action in district court."); Scottsdale I, 844
F.3d at 422 ("Neither party disputes that it is 'fairly discernible' that Congress
intended to preclude district court jurisdiction."); Charles Schwab & Co. v. FINRA,
861 F. Supp. 2d 1063, 1072 (N.D. Cal. 2012) ("The Exchange Act's administrative
review process is very similar to the administrative process at issue in Thunder
Basin.")., But even a cursory examination of Scottsdale's Complaint reveals that
its claim flunks the second part of the Thunder Basin test. Thunder Basin identified
three factors to determine whether a litigant's claim is the type Congress did
not intend for review through the statutory scheme: whether "adjudication of petitioner's
claims through the statutory-review provisions [would] violate due process by *80depriving
petitioner of meaningful review," id. at 214, 114 S.Ct. 771 ; whether the claims
are "wholly collateral" to the statute's review provisions, id. at 212, 114 S.Ct.
771 (citation and quotation marks omitted); and whether the claims are "outside
the agency's expertise." Id., Scottsdale's claim meets none of these standards.
The Complaint identifies three alleged breaches of contract: (1) that FINRA has
exceeded its statutory authority in using its Rule 2010 to punish Scottsdale for
violations of Section 5 of the Securities Act; (2) that FINRA has improperly issued
guidance and relied on that guidance to unfairly discipline smaller member firms
who are engaged in the microcap and low-priced securities business; and (3) that
FINRA's board does not adequately represent industry members. Scottsdale ties each
of these alleged misdeeds to one of FINRA's By-Laws. Scottsdale insists that FINRA
acts beyond its authority in disciplining violations of the Securities Act because
FINRA can only adopt rules that "carry out the purposes of the [Exchange] Act" and
are consistent with "applicable law." Opp'n at 3 (citing FINRA By-Laws, art. VII,
§ 1(a)(ii)-(iii); art. XI, § 1). It accuses FINRA of improperly promulgating guidance
with the force of law because FINRA's rules must be approved by the SEC before
being given effect. See id. (citing FINRA By-Laws, art. XI, § 1). And it attacks
the composition of FINRA's Board of Governors as failing to "assure fair representation
of its members in the ... administration of its affairs." Id. (citing 15 U.S.C.
§ 78o-3(b)(4) )., The problem for Scottsdale is that FINRA's rules are broadly
defined to include its "constitution, articles of incorporation, [and] bylaws,"
15 U.S.C. § 78c(a)(27), and those rules must be approved by the SEC, id. § 78s.
"[T]he Exchange Act lays out a comprehensive oversight scheme whereby Congress gives
the SEC the authority to supervise FINRA's rules, including approving or modifying
FINRA rules in any way the agency deems appropriate or necessary." Scottsdale I,
844 F.3d at 424. The composition of the Board of Governors is also set pursuant
to SEC-approved regulation. See Notice, 72 Fed. Reg. at 42182 (concluding, after
considering comments, that proposed rule change delineating number and composition
of governors "is consistent with the requirements of the Exchange Act"). While Scottsdale's
Complaint rests entirely on FINRA actions that allegedly violated its By-Laws, the
propriety of FINRA's actions or rules is "the type of question[ ] that the [SEC]
has frequently resolved in the past." Elk Run Coal Co. v. United States Dep't of
Labor, 804 F. Supp. 2d 8, 32 (D.D.C. 2011)., And while Scottsdale's Complaint does
not formally seek to enjoin or overturn any FINRA disciplinary efforts against it,
the actions of which it complains are integral to those efforts. See Compl. ¶¶ 3,
41-44 (alleging that FINRA improperly deployed *81guidance against small member
firms like Scottsdale); id. ¶¶ 3, 54 (alleging that FINRA has exceeded its authority
under the Exchange Act to deploy Rule 2010 in disciplinary proceedings against Scottsdale).
In this regard, the ostensible breach of contract claim operates as a collateral
attack on FINRA's disciplinary action. Consider, for example, Scottsdale's claim
regarding Rule 2010. It alleges that FINRA improperly used that Rule to discipline
Scottsdale, see Compl. ¶¶ 52-61, and asks the Court to (1) declare as much and (2)
determine that, by taking that allegedly ultra vires action, FINRA violated its
By-Laws and thus breached its contract with Scottsdale, id. Prayer for Relief ¶¶
1-2. Were the Court to do that, it would be tantamount to asserting that FINRA had
no authority to discipline Scottsdale in the way it did. Again, this Court lacks
power to do that. It is the SEC's role "to review 'a final disciplinary sanction
imposed by' FINRA and determine whether its rules 'were applied in a manner[ ]
consistent with the purposes' of the Exchange Act." Scottsdale I, 844 F.3d at 424
(citing 15 U.S.C. § 78s(e)(1) ) (alteration in original). And only a court of appeals
may review an SEC decision to uphold the sanction. This Court has no role in that
process., To avoid doubt, there is no serious argument to be made that Scottsdale
will be denied review in the administrative scheme. As explained, because its claims
are closely tied to the disciplinary proceedings, Scottsdale will have the opportunity
to make its case to an appellate court at the appropriate time. In fact, Scottsdale
is currently working its way through that scheme. See MTD Ex. A. It failed to convince
the NAC to overturn the FINRA Hearing Panel's decision and currently awaits resolution
at the SEC level. Id. Should the SEC uphold the decision, Scottsdale can turn to
an appellate court. See 15 U.S.C. § 78y(b). Likewise, Scottsdale's sister firm
has petitioned the SEC for a rulemaking to achieve a regulatory fix to many of the
same issues animating this suit. Its petition-seeking changes to the composition
of FINRA's Board of Governors and regulatory revisions to prevent FINRA from issuing
what Scottsdale views as improper guidance-is currently before the agency. See MTD
Ex. B. Scottsdale cannot have its cake and eat it, too. It cannot at once insist
that this suit seeks relief that falls outside the SEC's area of expertise and
that is not otherwise available to it, while also seeking precisely that same relief
before the SEC., In the recent words of the Chief Justice, the Court need not "exhibit
a naiveté from which ordinary citizens are free." Dep't of Commerce v. New York,
--- U.S. ----, 139 S. Ct. 2551, 2575, 204 L.E.2d 978 (2019) (quoting United States
v. Stanchich, 550 F.2d 1294, 1300 (2d Cir. 1977) ). "It would require the suspension
of disbelief to ascribe to Congress the design to allow its careful and thorough
remedial scheme to be circumvented by artful pleading." Brown v. Gen. Servs. Admin.,
425 U.S. 820, 833, 96 S.Ct. 1961, 48 L.Ed.2d 402 (1976) ; see also Brooks v. District
of Columbia, 375 F. Supp. 3d 41, 45 (D.D.C. 2019) ("Plaintiffs' crafty pleading
cannot hide the true nature of their claims. Nor *82can Plaintiffs' clever phrasing
be used to avoid a bar on judicial review." (citation omitted)). Instead, the Court
looks through the form of the Complaint to the substance of the allegations to determine
the true nature of Scottsdale's claim. See Valley Forge Christian Coll. v. Ams.
United for Separation of Church & State, Inc., 454 U.S. 464, 477, 102 S.Ct. 752,
70 L.Ed.2d 700 (1982). The form of Scottsdale's Complaint may say contract, but
its substance screams a challenge to FINRA's regulatory and disciplinary actions.,
Scottsdale relies on easily distinguishable cases for the notion that its claim
lies outside "the Commission's competence and expertise" and is not "of the type
Congress intended to be reviewed within th[e] statutory structure." Opp'n at 7
(citation omitted). First, it notes that in Free Enterprise Fund v. Public Company
Accounting Oversight Board, 561 U.S. 477, 130 S.Ct. 3138, 177 L.Ed.2d 706 (2010),
the Supreme Court carved out an exception to the Thunder Basin framework. That much
is true, but Scottsdale does not explain how that exception applies in this case,
and none of the facts informing Free Enterprise's holding apply to Scottsdale's
claim. First, the Free Enterprise plaintiffs challenged the constitutionality of
the Public Company Accounting Oversight Board's structure, an issue that is not
within the SEC's expertise. Id. at 491, 130 S.Ct. 3138. Scottsdale does not challenge
the validity of FINRA's existence or advance constitutional claims; it attacks
the propriety of FINRA's rules and actions. These issues, unlike the Article II
questions animating Free Enterprise, are firmly within the SEC's expertise.