The SEC's Tenuous, Tentative Case For Preemption

• Published date: 02 November 2022
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Securities
• Law Firm: Allen Matkins Leck Gamble Mallory & Natsis LLP
• Author: Mr Keith P. Bishop

The Securities and Exchange Commission's last week adopted rules requiring the securities exchanges to adopt listing standards requiring listed companies to develop and implement policies providing for the recovery of erroneously awarded incentive-based compensation received by current or former executive officers. In commenting on the proposed rule, I noted that the rules could conflict with state laws that prohibit employers from recouping compensation from their employees. The SEC did not duck the issue in its adopting release, asserting "With respect to preemption, as a general matter, listing standards adopted by national securities exchanges and associations at the direction of Congress and the Commission can preempt state laws in certain circumstances." However, the adopting release falls short of concluding that preemption is a certainty: "Accordingly, issuers should be able to assert that state laws that would prevent or impede recovery are preempted, although the outcomes for any particular state law would depend on the details of that provision." Issuers can always assert, the money question, of course, is will they prevail?

The SEC was able to cite only one case in support of its claim that issuers should be able to assert preemption - Credit Suisse First Bos. Corp. v. Grunwald, 400 F.3d 1119, 1128 (9th Cir. 2005). However, that case did not involve listing standards nor did it involve a national securities exchange. The question in that case was whether California's ethics standards...