Securities Newsroom

No Class Action Based On State Law Alleging Fraud In Connection With The Sale Or Purchase Of Covered Securities

Subsection 3(a) amends Section 16 of the Securities Act of 1933 by providing that:  No class action based on State law alleging fraud in connection with the sale or purchase of "covered securities" may be maintained in State or Federal court [Sec. 16(b)]; Any class action brought in State court involving a covered security shall be removable to a Federal district court, and may be dismissed pursuant to the provisions of subsection (b) [Sec. 16(c)].An exception is made to preserve certain law suits brought under State law affecting the conduct of corporate officers with respect to certain corporate actions, including tender offers, exchange offers or the exercise of dissenter's or appraisal rights [Sec. 16(d)]. This subsection also emphasizes that state securities commissions retain their jurisdiction to investigate and bring enforcement actions [Sec. 16(e)]. Finally, this subsection provides a set of definitions, including definitions of "class action," "covered security," and "affiliate of the issuer." "Affiliate of the issuer" means "a person that directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with the issuer" [Sec. 16(f)(1)]. "Class action" is defined to include any lawsuit or group of lawsuits where damages are sought on behalf of more than 50 persons. The definition is intended to capture "mass actions," but to exclude shareholder derivative actions and actions by a group of less than 50 individuals or entities [Sec. 16(f)(2)]. Covered securities" means a security that satisfies the definition of that term given in subsection 18(b)(1) and 18(b)(2) of the Securities Act of 1933 [Sec. 16(f)(3)].Subsection 3(b) of the bill amends Section 28 of the Securities Exchange Act of 1934 to make that section consistent with the amendments made by Subsection 3(a) to the Securities Act of 1933.