A new federal lawsuit filed by the Securities Industry Association Thursday hopes to overturn a law passed recently by Utah legislators that requires broker-dealers to inform the state’s Division of Securities when there is a “failure to deliver” securities issued by Utah companies that are traded on national markets.
The SIA says the law oversteps the state’s bounds, illegally impeding upon the Securities Exchange Commission’s jurisdiction and it preempted by federal securities law.
SIA is seeking a temporary restraining order and has called for a permanent injunction prohibiting the application of the law as part of the complaint.
Legislators say the Utah law, SB 3004, is designed to regulate “naked” short selling, but the SIA counters that the new regulatory requirements are not specific enough. Instead of being a narrowly tailored law that targets naked short selling exclusively, the SIA says the law affects all “fails to deliver,” including covered short selling and purchases of a stock when the buyer expects the price to rise.
“On this issue, federal law could not be more explicit: the states are expressly prohibited from establishing operational or record-keeping requirements that are different from the requirements of the Securities Exchange Act,” says Marc Lackritz, president of SIA. “If each state is granted the authority to set its own rules, the resulting labyrinth of regulation would choke our financial markets. Already, companies launching IPOs shop globally for more accommodating regulatory environments. Allowing each state to add its own regulatory regime would only exacerbate this growing problem, further reducing the competitiveness of US financial markets.”
The law penalizes any Utah licensed broker-dealer who does not report fails to deliver and requires specific information about each failure.
The SIA says the information required in reporting could be considered a breach of privacy expectations broker-dealers have from their clients.
The law also allows the state of Utah to sue and collect damages from broker-dealers who violate the law, the SIA says, even those who are found not to be at fault and in cases where the company was not harmed.