The Supreme Court held May 16 that the exclusive federal jurisdiction provision of the 1934 Securities Exchange Act means the same as the “arising under” test for federal-question jurisdiction and does not pre-empt state law claims unless they require proving a violation of a rule or regulation under the Act.

Manning and other shareholder plaintiffs filed suit against Merrill Lynch and others in New Jersey state court alleging naked short selling in violation of SEC Regulation SHO (which requires a “good locate” at the time of a short trade to prevent naked shorting). But Plaintiffs’ complaint asserted only state-law claims (“little RICO”, Blue Sky and common-law claims), even while referring explicitly to Reg. SHO. Merrill Lynch removed to federal court under’34 Act § 27 (which confers exclusive federal jurisdiction over actions “to enforce any liability or duty creating by the [Exchange Act] or the rule or regulations thereunder”). The District Court denied remand, but the Third Circuit reversed.

The Supreme Court unanimously affirmed, with the majority (by Justice Kagan) holding that Section 27’s “brought to enforce” means the same thing as “arising under” for federal-question jurisdiction under 28 U.S.C. § 1331; thus, it does not necessarily pre-empt suits to enforce state law obligations – even if they explicitly cite to SEC Rules. Slip Op. at 9 (“cannot deny” that opinion holds they “mean exactly the same thing”).

So §27 confers federal jurisdiction when an action is commenced in order to give effect to an Exchange Act requirement. That language, in emphasizing what the suit is designed to accomplish, stops short of embracing any complaint that happens to mention a duty established by the Exchange Act.

Slip Op. at 6.

Critically, although the complaint cited and discussed Reg. SHO, the New Jersey claims it asserted did not actually require proof of a Reg. SHO violation in order for Plaintiffs to recover:

On rare occasions, as just suggested, a suit raising a state-law claim rises or falls on the plaintiff’s ability to prove the violation of a federal duty. … If in that manner, a state-law action necessarily depends on a showing that the defendant breached the Exchange Act, then that suit could also fall within §27’s compass.

Slip Op. at 7 (citations omitted).

Concurring in the result, Justices Thomas and Sotomayor wrote that “brought to enforce” means “alleges a claim that necessarily depends on a breach of a requirement created by the [Exchange] Act,” and the Court need not have gone further to hold it means the same as “arising under.” Slip Op. at 22-31.

Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Manning, No. 14-1132 (May 16, 2016) (slip op. here)