Generally when broker-dealers are subject to court jurisdiction, that jurisdiction, based either on diversity or subject matter, places the dispute in federal courts. However, that has not necessarily been the case in class actions. The issue of state versus federal court jurisdiction was argued before the U.S. Supreme Court on November 28, 2017. The Supreme Court heard oral arguments in Cyan, Inc. v. Beaver County Employees Retirement Fund regarding whether states had jurisdiction over “covered class actions” that allege violations of the Securities Act of 1933 (the “33 Act”). Specifically, the Court considered whether an amendment to the 33 Act—the Securities Litigation Uniform Standards Act of 1998 (SLUSA)—precluded states from hearing the vast majority of 33 Act claims. The Court tangled with both sides over Congress’ intent in passing SLUSA and the text of SLUSA, which Justice Alito referred to as “gibberish.”
Petitioner argued that Congress enacted SLUSA to eliminate concurrent jurisdiction for 33 Act cases involving “covered class actions,” which generally involve suits seeking damages on behalf of 50 or more plaintiffs. 15 U.S.C.S. § 77p. Respondent argued that Congress’ “obtuse language” in conjunction with the fact that the 33 Act “had always provided for state court jurisdiction” meant that Congress would only have taken away state jurisdiction by expressly stating so.
The Office of the Solicitor General, arguing as an amicus, staked out an alternative third argument. The Office of the Solicitor General directed the Court to §16(c), which allows defendants to remove “covered class actions,” arguing that this evidenced Congress’ intention to “reestablish federal courts as the preferred venue” for large securities actions, without eliminating state jurisdiction.
Several of the Justices expressed uncertainty about these arguments. Justice Ginsburg wondered why, if Congress wanted to grant federal courts “exclusive jurisdiction,” Congress didn’t “simply” and “clear[ly]” say so. Similarly, Justice Kagan found it “odd” that Congress would narrowly focus on §16(f), when § 22(a) refers to § 16 in its entirety. Justice Gorsuch, while admitting that SLUSA’s amendments might indeed be “gibberish,” cautioned that Respondent’s position might render aspects of SLUSA “superfluous.”
While it is unclear which side will prevail, Justice Gorsuch seemed to capture the essence of the Court’s dilemma by stating that “it seems like it’s gibberish all the way down here.”
CONCLUSION: Class actions against broker-dealers are excluded from FINRA’s jurisdiction in accordance with the Code of Arbitration Procedure Sections 12204 and 13204. Consequently, the ultimate determination of the Supreme Court will be significant to broker-dealers, who often rely on federal courts to be a more even-handed forum for brokerage disputes.
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