The Securities Litigation Uniform Standards Act of 1998 (SLUSA), {{uspl, 105, 353, 112 Stat. 3227, is a federal legislative act in the United States regarding private
class action
A class action, also known as a class-action lawsuit, class suit, or representative action, is a type of lawsuit where one of the parties is a group of people who are represented collectively by a member or members of that group. The class actio ...
lawsuits for
securities fraud
Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in lo ...
. SLUSA amended portions of the
Securities Act of 1933 and the
Securities Exchange Act of 1934 to
preempt
Preempt (also spelled "pre-empt") is a bid in contract bridge whose primary objectives are (1) to thwart opponents' ability to bid to their best contract, with some safety, and (2) to fully describe one's hand to one's partner in a single bid. A ...
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,
Congress
A congress is a formal meeting of the representatives of different countries, constituent states, organizations, trade unions, political parties, or other groups. The term originated in Late Middle English to denote an encounter (meeting of ...
passed the
Private Securities Litigation Reform Act The Private Securities Litigation Reform Act of 1995, , 109 Stat. 737 (codified as amended in scattered sections of 15 U.S.C.) ("PSLRA") implemented several substantive changes in the United States that have affected certain cases brought under the ...
(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
In law as practiced in countries that follow the English models, a pleading is a formal written statement of a party's claims or defenses to another party's claims in a civil action. The parties' pleadings in a case define the issues to be adju ...
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 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
A stock exchange, securities exchange, or bourse is an exchange where stockbrokers and traders can buy and sell securities, such as shares of stock, bonds and other financial instruments. Stock exchanges may also provide facilities for th ...
.
Scope of preemption
In ''
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit'', 547 U.S. 71 (2006), the
U.S. Supreme Court
The Supreme Court of the United States (SCOTUS) is the highest court in the federal judiciary of the United States. It has ultimate appellate jurisdiction over all U.S. federal court cases, and over state court cases that involve a point o ...
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, codified at , is one of the most important rules targeting securities fraud promulgated by the U.S. Securities and Exchange Commission, pursuant to its authority granted under § 10(b) of the Securities Exchange Act of 1934. The rul ...
only establishes a private
cause of action
A cause of action or right of action, in law, is a set of facts sufficient to justify suing to obtain money or property, or to justify the enforcement of a legal right against another party. The term also refers to the legal theory upon which a p ...
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
incorporated. It also excludes any actions brought by a state agency, a state
pension
A pension (, from Latin ''pensiō'', "payment") is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments ...
plan, actions under contracts between issuers and
indenture trust
An indenture is a legal contract that reflects or covers a debt or purchase obligation. It specifically refers to two types of practices: in historical usage, an indentured servant status, and in modern usage, it is an instrument used for commercia ...
ees, and
derivative action A shareholder derivative suit is a lawsuit brought by a shareholder on behalf of a corporation against a third party. Often, the third party is an insider of the corporation, such as an executive officer or director. Shareholder derivative suits are ...
s brought by shareholders on behalf of a corporation. SLUSA also expressly preserves state court
jurisdiction
Jurisdiction (from Latin 'law' + 'declaration') is the legal term for the legal authority granted to a legal entity to enact justice. In federations like the United States, areas of jurisdiction apply to local, state, and federal levels.
Jur ...
over state agency enforcement proceedings.
[15 U.S.C. §78bb(f)(4).]
See also
*
''In re American Realty Capital Properties, Inc. Litigation'', regarding alleged violations of
Section 11 of the Securities Act of 1933.
Notes
United States federal securities legislation
Acts of the 105th United States Congress