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Regulation and Compliance > State Regulation > NASAA

NASAA Sides with Nanopierce Against Preemption

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WASHINGTON (–The North American Securities Administrators Association Inc. has filed a friend-of-the-court brief with the Supreme Court of Nevada, in a move that if successful would clear the way for state lawsuits against registered clearing houses over the effects of naked short sales.

The lawsuit, Nanopierce Technologies v. Depository Trust Co., involves the contention of the plaintiff, a Denver microelectronics firm, that the defendant DTC has failed in its obligation to disclose certain defects in its stock borrowing program, defects that Nanopierce says have had negative consequences for the company and its investors.

The brief says that NASAA, an organization devoted to defending the interests of the securities regulators in the United States, Mexico and Canada, has two interests in the outcome of the appeal. First, it contends that the plaintiffs’ claims (which the brief generally refers to as “investors’ claims”–thus taking the point of view not of Nanopierce, per se, but of its stockholders) deserve a hearing on the merits.

“While the Investors’ claims may be novel ?? 1/2 in a rapidly changing marketplace where financial crime is increasingly subtle and sophisticated, plaintiffs who have suffered injury must often fashion new theories to reach those who are responsible for their losses,” the brief states.

Second, NASAA holds that the preemption argument (that is, the contention of the Securities and Exchange Commission in its amicus brief filed in February, that state-law litigation should be discouraged because it could impose substantial costs upon the federal regulatory system) poses a general threat to the public interest, because the state role in protecting investors from fraud under the common law has always been and remains a vital one.

The plaintiffs don’t seek “through this lawsuit to replace or restructure the nation’s clearing agencies or any legitimate mechanisms that Congress and the SEC have established for clearing and settling securities transactions. Their claims are aimed at unlawful conduct in connection with the operation of those mechanisms, and they should not be extinguished in the name of preemption.”

There are two different concepts in U.S. federal and constitutional law that go by the name “preemption.” On the one hand, there is “field preemption,” according to which the federal government can sometimes be said to occupy the whole of a field of law, leaving no role for the states. On the other hand, there is “conflict preemption,” according to which the states can also occupy the field, but the effects of their laws must give way in situations of direct conflict between federal and state rules, standards, etc.

NASAA’s brief reviews the precedents and pertinent statutes under both field and conflict preemption. It concludes that since “Congress has clearly preserved the application of state law in numerous savings clauses found throughout the federal securities acts,” a finding of field preemption can’t be made. Furthermore, conflict preemption “requires a showing that irreconcilable obligations are being imposed upon a party or that Congressional purposes are being thwarted.” This, too, is inapplicable since clearing agencies could comply simultaneously with the state laws underlying the Nanopierce complaint and with the existing federal laws and regulations.

The NASAA doesn’t directly acknowledge the SEC’s brief in the main text of its own brief. Instead, there is one reference in a footnote.

Defendant DTC is a member of the U.S. Federal Reserve System, a limited-purpose trust company under New York State banking law, and a registered clearing agency with the SEC, as well as a subsidiary of Depository Trust & Clearing Corporation, New York. In a statement Friday [May 5], a DTCC spokeswoman said that she’s “perplexed that NASAA has chosen to inappropriately inject itself into this action and directly oppose one state court, two federal courts and the SEC, all of whom have said that these types of claims must be dismissed. We are also surprised that the NASAA has essentially taken at face value plaintiffs’ unfounded allegations–claims that have been squarely rejected by the SEC and dismissed by courts around the country.”

She also said that DTCC has repeatedly, on its own initiative, met with NASAA officials and select state securities regulators to explain to them how the stock borrow program works. The DTCC is surprised at this brief, because the NASAA hadn’t on these occasions, or in several conference calls including NASAA’s general counsel, “indicated any substantive concerns to DTCC as implied in this current action.”

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