Securities Litigation Uniform Standards Act
Encyclopedia
The Securities Litigation Uniform Standards Act of 1998 (SLUSA) is a federal legislative act in the United States regarding private class action
lawsuits for securities fraud
. SLUSA amended portions of the Securities Act of 1933
and the Securities Exchange Act of 1934
to preempt
certain class actions that alleged fraud under state law "in connection with the purchase or sale" of securities. Such lawsuits cannot be filed in state or federal court.
passed the Private Securities Litigation Reform Act
(PSLRA), claiming that the class action device was being used to injure "the entire U.S. economy" through nuisance filings, targeting of deep-pocket defendants, vexatious discovery requests, and "manipulation by class action lawyers of the clients whom they purportedly represent." The PSLRA accordingly imposed new restrictions that included a heightened pleading
standard for securities class actions, damage caps, and mandatory sanctions for frivolous litigation.
The consequence was that many securities fraud plaintiffs sought to escape the new strictures under the PSLRA by avoiding federal court altogether. While historically securities cases were rare in state court, state law-based class actions for securities fraud now became common. Congress conducted a hearing in 1997 to evaluate these effects of the PSLRA, and subsequently enacted SLUSA to stem this "shift from Federal to State courts" and "prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of" the Reform Act.
Another key provision of the statute makes all "covered class actions" filed in state court removable
to federal court, which it defines as a lawsuit in which damages are sought on behalf of more than 50 people. A "covered security" is one traded nationally and listed on a regulated national stock exchange
.
, 547 U.S. 71 (2006), the U.S. Supreme Court
ruled that SLUSA operated to preempt state law "holder" claims, which alleged injury based on the prolonged retention of stock due to fraud, as well as claims arising from the fraud-induced purchase or sale of securities. Though SEC Rule 10b-5
only establishes a private cause of action
under federal law for purchaser-seller claims, and that rule uses the same "in connection with" language as SLUSA, the Court ruled that the exclusion of holder claims from Rule 10b-5 was a judicially crafted limitation on private litigation, not an interpretation of its language. The Court believed that the policy behind SLUSA indicated that its language should be given broad effect, to close the holder claim loophole.
. It also excludes any actions brought by a state agency, a state pension
plan, actions under contracts between issuers and indenture trustees, and derivative actions brought by shareholders on behalf of a corporation.SLUSA also expressly preserves state court jurisdiction
over state agency enforcement proceedings.
Class action
In law, a class action, a class suit, or a representative action is a form of lawsuit in which a large group of people collectively bring a claim to court and/or in which a class of defendants is being sued...
lawsuits for securities fraud
Securities fraud
Securities fraud, also known as stock fraud and investment fraud, is a practice that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in losses, in violation of the securities laws....
. SLUSA amended portions of the Securities Act of 1933
Securities Act of 1933
Congress enacted the Securities Act of 1933 , in the aftermath of the stock market crash of 1929 and during the ensuing Great Depression...
and the Securities Exchange Act of 1934
Securities Exchange Act of 1934
The Securities Exchange Act of 1934 , , codified at et seq., is a law governing the secondary trading of securities in the United States of America. It was a sweeping piece of legislation...
to preempt
Federal preemption
Federal preemption refers to the invalidation of US state law when it conflicts with Federal law.-Constitutional basis:According to the Supremacy Clause of the United States Constitution,...
certain class actions that alleged fraud under state law "in connection with the purchase or sale" of securities. Such lawsuits cannot be filed in state or federal court.
Background
In 1995, CongressUnited States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....
passed the Private Securities Litigation Reform Act
Private Securities Litigation Reform Act
The United States Private Securities Litigation Reform Act of 1995, Pub. L. 104-67, 109 Stat. 737 implemented several substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation, and...
(PSLRA), claiming that the class action device was being used to injure "the entire U.S. economy" through nuisance filings, targeting of deep-pocket defendants, vexatious discovery requests, and "manipulation by class action lawyers of the clients whom they purportedly represent." The PSLRA accordingly imposed new restrictions that included a heightened pleading
Pleading
In law as practiced in countries that follow the English models, a pleading is a formal written statement filed with a court by parties in a civil action, other than a motion...
standard for securities class actions, damage caps, and mandatory sanctions for frivolous litigation.
The consequence was that many securities fraud plaintiffs sought to escape the new strictures under the PSLRA by avoiding federal court altogether. While historically securities cases were rare in state court, state law-based class actions for securities fraud now became common. Congress conducted a hearing in 1997 to evaluate these effects of the PSLRA, and subsequently enacted SLUSA to stem this "shift from Federal to State courts" and "prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives of" the Reform Act.
Provisions
The core provision of SLUSA reads as follows:- CLASS ACTION LIMITATIONS. -- No covered class action based upon the statutory or common law of any State or subdivision thereof may be maintained in any State or Federal court by any private party alleging --
-
- (A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or
-
- (B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.
Another key provision of the statute makes all "covered class actions" filed in state court removable
Removal jurisdiction
In the United States, removal jurisdiction refers to the right of a defendant to move a lawsuit filed in state court to the federal district court for the federal judicial district in which the state court sits. This is a general exception to the usual American rule giving the plaintiff the right...
to federal court, which it defines as a lawsuit in which damages are sought on behalf of more than 50 people. A "covered security" is one traded nationally and listed on a regulated national stock exchange
Stock exchange
A stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and...
.
Scope of preemption
In Merrill Lynch, Pierce, Fenner & Smith, Inc. v. DabitMerrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71 , was a case decided by the Supreme Court of the United States involving the extent to which state law securities fraud class action claims were preempted by the Securities Litigation Uniform Standards Act of 1998...
, 547 U.S. 71 (2006), the U.S. Supreme Court
Supreme Court of the United States
The Supreme Court of the United States is the highest court in the United States. It has ultimate appellate jurisdiction over all state and federal courts, and original jurisdiction over a small range of cases...
ruled that SLUSA operated to preempt state law "holder" claims, which alleged injury based on the prolonged retention of stock due to fraud, as well as claims arising from the fraud-induced purchase or sale of securities. Though SEC Rule 10b-5
SEC Rule 10b-5
SEC Rule 10b-5, codified at 17 C.F.R. § 240.10b-5, is one of the most important rules promulgated by the U.S. Securities and Exchange Commission, pursuant to its authority granted under § 10 of the Securities Exchange Act of 1934...
only establishes a private cause of action
Cause of action
In the law, a cause of action is a set of facts sufficient to justify a right to sue to obtain money, property, or the enforcement of a right against another party. The term also refers to the legal theory upon which a plaintiff brings suit...
under federal law for purchaser-seller claims, and that rule uses the same "in connection with" language as SLUSA, the Court ruled that the exclusion of holder claims from Rule 10b-5 was a judicially crafted limitation on private litigation, not an interpretation of its language. The Court believed that the policy behind SLUSA indicated that its language should be given broad effect, to close the holder claim loophole.
Exemptions
SLUSA exempts from its preemption coverage certain class actions that are based on the law of the state in which the issuer of the security is incorporatedIncorporation (business)
Incorporation is the forming of a new corporation . The corporation may be a business, a non-profit organisation, sports club, or a government of a new city or town...
. It also excludes any actions brought by a state agency, a state pension
Pension
In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...
plan, actions under contracts between issuers and indenture trustees, and derivative actions brought by shareholders on behalf of a corporation.SLUSA also expressly preserves state court jurisdiction
Jurisdiction
Jurisdiction is the practical authority granted to a formally constituted legal body or to a political leader to deal with and make pronouncements on legal matters and, by implication, to administer justice within a defined area of responsibility...
over state agency enforcement proceedings.