United States: Supreme Court Clarifies Jurisdiction Under Securities Exchange Act

The U.S. Supreme Court ruled today that the provision of the Securities Exchange Act of 1934 granting federal district courts exclusive jurisdiction over suits brought to enforce the Exchange Act is subject to the same jurisdictional test established by the general federal-question jurisdictional statute. The Court held in Merrill Lynch v. Manning that, under both statutes, the question is whether the case "arises under a federal law." The Court thus rejected the defendants' effort to remove a case from state court by asserting a broader theory of federal jurisdiction under the Exchange Act.

Factual Background

The Manning case was filed in New Jersey state court by shareholders of a company whose stock had been shorted by the defendant financial institutions. The shareholders contended that the defendants had engaged in "naked" short-selling of the company's stock, thereby allegedly diluting the shareholders' voting rights and causing the stock's value to decline. The plaintiffs pled only state-law claims, but their complaint also repeatedly mentioned the Securities and Exchange Commission's Regulation SHO – the anti-fraud rule governing "naked" short-selling – and asserted expressly and by implication that the defendants had violated the federal securities laws.

The defendants removed the case to federal court, contending that federal jurisdiction existed under (i) the general "federal question" statute (28 U.S.C. § 1331) because the plaintiffs' state-law claims involved questions of federal law and (ii) § 27 of the Exchange Act, which gives federal district courts exclusive jurisdiction over suits "to enforce any liability or duty created by" the Exchange Act or SEC rules promulgated under it. The District Court upheld the removal, believing that the case was premised on – and that its resolution depended upon – the alleged violation of Regulation SHO. But the Court of Appeals for the Third Circuit reversed.

The Third Circuit first concluded that the case was not removable under the general federal-question statute because, even though the complaint had alleged violations of federal law, resolution of the federal issue was not "necessary" to the outcome of the case. A state court could adjudicate the plaintiffs' claims solely under state law, without reference to federal law. The Third Circuit also rejected the Exchange Act's exclusive-jurisdiction provision as a separate basis for removal, holding that exclusive-jurisdiction provisions such as § 27 do not expand the scope of federal jurisdiction under the general federal-question statute; they serve only to divest state courts of jurisdiction over the specified matters.

In so ruling, the Third Circuit agreed with precedent from the Second Circuit on the exclusive-jurisdiction issue, but disagreed with Ninth and Fifth Circuit cases holding that exclusive-jurisdiction provisions such as § 27 can establish jurisdiction even when the federal-question jurisdiction provision does not do so. The Supreme Court granted certiorari to resolve the Circuit split, and it affirmed the Third Circuit's ruling.

Supreme Court's Decision

The Supreme Court agreed with the Third Circuit that the jurisdictional test in § 27 of the Exchange Act "matches the one we have formulated for § 1331 [i.e., the general federal-question statute], as applied to cases involving the Exchange Act. If (but only if) such a case meets the 'arising under' standard, § 27 commands that it go to federal court."

The Court reviewed its jurisprudence under the federal-question statute and reiterated that a case can "arise under" federal law in two ways. "Most directly, and most often, federal jurisdiction attaches when federal law creates the cause of action asserted" – in other words, when the complaint pleads a claim denominated as a federal cause of action. But a case can also "arise under" federal law if a state-law claim "necessarily raise[s] a stated federal issue, actually disputed and substantial, which a federal forum may entertain without disturbing any congressionally approved balance of federal and state power."

The Court rejected the defendants' contention that Exchange Act § 27's jurisdictional grant for suits "brought to enforce any liability or duty created by [the Exchange Act]" was somehow broader than the federal-question statute's jurisdictional scope under the "arising under" standard.

Six of the eight Justices joined the majority opinion by Justice Kagan. Justice Thomas, with Justice Sotomayor, concurred in the judgment. The concurrence would have rested the judgment on the "brought to enforce" language of § 27 itself, which (according to Justice Thomas) would not have supported federal jurisdiction in this case because the complaint did not allege a federal claim. Justices Thomas and Sotomayor therefore disagreed with the majority's conclusion that the federal-question statute's "arising under" phrase is the same as the Exchange Act's "brought to enforce" phrase.


The Court's decision clarifies that the jurisdictional tests under § 27 of the Exchange Act and under the general federal-question statute are the same – and that both are subject to familiar "arising under" principles. The decision also leaves certain issues for potential future consideration.

First, the Court did not retreat from its standards for determining whether a question "arises under" federal law. The decision confirms that a plaintiff cannot avoid federal jurisdiction by pleading a state-law claim if that claim depends on a resolution of a disputed and substantial question of federal law.

Second, the Court and the concurrence did not consider the Third Circuit's conclusion that the plaintiff's claims did not necessarily raise a federal issue, because the defendants had not challenged that portion of the ruling. The decision therefore does not add to the meaning of "arising under" jurisprudence – and it does not address whether the Third Circuit correctly concluded that issues concerning SEC Regulation SHO were not necessary to disposition of the case.

Third, the Court chose not to construe § 27's grant of exclusive federal jurisdiction for "violations of the [Exchange Act] or the rules and regulations thereunder." The plaintiff had argued that the "violations" language applies only to criminal proceedings and SEC enforcement actions, not private actions. The defendants had contended that the "violations" clause was irrelevant because, "in private suits for damages, it goes no further than the 'brought to enforce' language." The Court concluded that, because "both parties have thus taken the 'violations' language off the table, we do not address its meaning." Whether the "violations" language expands the statute's jurisdictional scope even though the "brought to enforce" language does not do so is therefore perhaps an open question for another day.

Supreme Court Clarifies Jurisdiction Under Securities Exchange Act

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.