The Split Continues: An Update on the Never-Ending Ambiguity Surrounding the Securities Litigation Uniform Standards Act

Emiley E. Dillon


Securities litigation and enforcement often increase in times of financial hardship and crisis, and experts believe that the COVID-19 pandemic will be another example of this reality.[1] One critical choice any plaintiff’s attorney in a securities-related class action must make is whether to bring a claim under federal or state law. As securities litigation increases in response to COVID-19, this jurisdictional decision will likely become more relevant.[2] Even before COVID-19, however, this choice has taunted securities lawyers. Congress enacted the Securities Litigation Uniform Standards Act (SLUSA) to give effect to the Private Securities Litigation Reform Act (PSLRA) by preventing claimants from bringing security fraud claims in state court as a method of avoiding the PSLRA’s more stringent federal pleading standards.[3] The SLUSA provides that a claimant may not bring a class action involving more than 50 members in any state court based on state law if the claim involves a nationally listed security and alleges “an untrue statement or omission of a material fact . . . [or] manipulative or deceptive device or contrivance” in connection with buying or selling a covered security.[4]

Federal circuit courts have taken varying approaches to the single question of when a complaint alleges a misstatement or omission sufficient to warrant SLUSA preemption.[5] The question of preemption becomes more difficult to answer when the complaint alleges traditional state-law claims of breach of fiduciary duty or breach of contract with incidental aspects of security fraud.[6] With the increasing willingness of the circuits to interpret the SLUSA broadly and the growing amount of pandemic-related securities litigation, there may be more opportunities for the Supreme Court to finally provide clarity on this issue.

I. The Legislation

Section 10(b) of the Securities Exchange Act of 1934 and the Securities and Exchange Commission’s Rule 10b-5 broadly prohibit fraud in connection with the purchase or sale of securities.[7] The SEC has express statutory authority to enforce the rule, and in 1946, the judiciary complemented these laws by recognizing a private right of action for violation of these provisions.[8] Two subsequent pieces of legislation, the PSLRA and SLUSA, work together to form the basis of the uncertainty surrounding private securities class actions alleging elements of Rule 10b-5 fraud in state court.

A. The Private Securities Litigation Reform Act of 1995

Before the PSLRA, plaintiffs frequently filed frivolous Rule 10b-5 claims in an attempt to extract large settlements.[9] In 1995, Congress enacted the PSLRA as a method of codifying this private right of action to combat frivolous securities fraud claims.[10] Congress’s express intent for enacting the PSLRA was to protect “investors, issuers, and all who are associated with capital markets from abusive securities litigation.”[11] To prevent these abuses, the PSLRA made the requirements for initially pleading Rule 10b-5 claims more stringent than those imposed by the Federal Rules of Civil Procedure.[12] Under the PSLRA, “the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.”[13] As a result of PSLRA’s heightened pleading requirements, claimants began pursuing their class actions under state law to avoid the federal forum.[14]

B. The Securities Litigation Uniform Standards Act

In 1998, Congress responded to the increasing use of state forums by enacting the Securities Litigation Uniform Standards Act to “prevent certain State private securities class action lawsuits alleging fraud from being used to frustrate the objectives” of the PLSRA.[15] SLUSA prohibits plaintiffs from filing class actions in state court when: (1) the class involves more than 50 members; (2) the claims are based on state law; (3) the claim involves a nationally listed security; and (4) when the complaint alleges “an untrue statement or omission of a material fact in connection with” buying or selling a covered security or a “manipulative or deceptive device or contrivance in connection with” buying or selling a covered security.[16] The Supreme Court has held that the SLUSA should be construed broadly to not “undercut the effectiveness” of the PSLRA.[17]

II. The Supreme Court’s Guidance

 In Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, the Supreme Court provided limited guidance to the proper interpretation of the SLUSA, although it did not specifically address the issue of when a plaintiff’s complaint is “alleging” a misrepresentation.[18] In that case, Mr. Dabit filed a class action in federal court alleging state-law claims of breach of fiduciary duty and breach of contract based on biased research and investment recommendations.[19] Dabit’s complaint alleged that Merrill Lynch breached its fiduciary duty by disseminating misleading research and manipulating stock prices, which caused class members to hold on to overvalued securities and caused brokers to lose commission fees when clients sought business elsewhere.[20] The U.S. Court of Appeals for the Second Circuit concluded that the claim fell outside of SLUSA preemption because the claims were asserted by “holders” of securities and were not in connection with a purchase or sale.[21] The Supreme Court vacated the decision, holding that the SLUSA should be interpreted broadly.[22] The Court noted that “[t]he presumption that Congress envisioned a broad construction follows not only from ordinary principles of statutory construction but also from the particular concerns that culminated in the SLUSA’s enactment.”[23] The Court stated that a narrow reading of the SLUSA would run afoul of its objectives, namely, preventing plaintiffs alleging fraud from using certain state securities class actions to escape the PSLRA.[24] In stating that the SLUSA should be interpreted broadly, the Court noted that the SLUSA does not actually preempt any state cause of action; rather, it simply denies plaintiffs the ability to use a class action as the device for certain claims.[25]

III. The Circuit Split: How to Interpret “Alleging”

SLUSA’s seemingly straightforward language has caused interpretive issues among the federal circuits.[26] Specifically, courts have struggled to determine when a complaint alleging “a misrepresentation or omission” in connection with the buying or selling of a covered security falls within the SLUSA’s purview.[27] For example, should a breach of fiduciary duty claim that involves securities always fall under the SLUSA? What about breach of contract claims that also involve failure to disclose? When typical contract claims are correlated with security-related issues, courts have had difficulty interpreting when the SLUSA should apply.[28] Three major interpretive categories have emerged: (1) the majority’s “proof” inquiry; (2) the Sixth Circuit’s “literalist approach;” and (3) the Seventh Circuit’s “implied omission” approach.[29]

A. The Majority’s Proof Inquiry

The majority of circuits ask whether plaintiffs can prevail on their claims without proving allegations of misrepresentations or omissions as covered under the SLUSA, although some may phrase the inquiry differently.[30] In other words, most circuits find that the SLUSA applies to preempt a class action whenever an allegation of fraud is a “factual predicate” or the “gravamen” of a state law claim.[31] Circuits falling into the majority will find preemption regardless of whether the plaintiff is asserting liability under a state law claim that does not include fraudulent conduct as an essential element.[32] The key inquiry in circuits that follow this majority analysis is whether the plaintiff will have to prove that the defendant engaged in fraud. The Third and Ninth Circuits both provide examples of this general approach, although they differ slightly in how they handle dismissals.[33]

1. The Third Circuit

Courts and scholars have described the Third Circuit’s approach to the SLUSA as the most lenient because the court looks only to what the plaintiff must prove.[34] In LaSala v. Bordier et Cie, the Third Circuit held that the SLUSA did not preempt the plaintiffs’ claims because any allegations of misrepresentation were not factual predicates that the plaintiffs had to prove to make out a claim.[35]  The plaintiffs, trustees of a bankrupt corporation’s liquidating trust, brought an action against a private Swiss bank claiming they aided and abetted a breach of fiduciary duty by the corporation’s former heads.[36] In finding that allegations of misrepresentation did not cause SLUSA preemption, the court noted that “[w]hile it may be unwise . . . to set out extraneous allegations of misrepresentations in a complaint, the inclusion of such extraneous allegations does not operate to require that the complaint must be dismissed under SLUSA.”[37] The SLUSA will apply when a complaint includes “an allegation of a misrepresentation in connection with a securities trade” that “is a ‘factual predicate’ of the claim, even if misrepresentation is not a legal element of the claim.”[38]

2. The Ninth Circuit

 The Ninth Circuit takes what courts have referred to as the “intermediate approach” to the SLUSA preemption issue.[39] The approach looks beyond the words of the complaint and to what the plaintiff must prove, similar to the Third Circuit.[40] Additionally, the Ninth Circuit has recognized that plaintiffs should be given leave to amend their complaints when it is clear that the complaint could be saved by such amendment.[41] In Freeman Investments, L.P. v. Pacific Life Insurance, the Ninth Circuit held that a class action against an insurer alleging breach of fiduciary duty and contract for excessive cost of insurance did not fall under the SLUSA.[42] The plaintiffs claimed that “they expected Pacific to calculate the cost of insurance charge ‘based on industry accepted actuarial determinations,’ but the company deviated from industry norms and debited an amount ‘in excess of true mortality charges.’”[43] The court stated that to succeed on the claim, plaintiffs only needed to show that their interpretation of the contract term was the correct one, not that Pacific engaged in misrepresentations or omissions.[44] The court noted that “[j]ust as plaintiffs cannot avoid SLUSA through crafty pleading, defendants may not recast contract claims as fraud claims by arguing that they ‘really’ involve deception or misrepresentation.”[45]

B. The Sixth Circuit’s “Literalist Approach”

The Sixth Circuit has taken what courts have called the broad “literalist approach.”[46] Under this approach, courts look at the complaint as a whole to determine if there are any explicit or implicit allegations of misrepresentation or omissions of material fact in connection with the purchase or sale of a covered security, regardless of whether it is an essential legal element.[47] In Segal v. Fifth Third Bank, N.A., a beneficiary of trust accounts, Mr. Segal, sued the Fifth Third Bank on behalf of himself and other beneficiaries of the trust for breach of fiduciary duty and contract.[48] The complaint alleged that Fifth Third Bank invested assets in Fifth Third mutual funds with higher fees rather than in superior funds by the bank’s competitors and promised individualized management while providing automated management.[49] The district court granted Fifth Third’s motion to dismiss with prejudice, relying on SLUSA preemption, and Segal filed for appeal on the grounds that his complaint did not allege an “untrue statement” or a “material omission” as required to fall under the SLUSA but, rather, alleged breach of fiduciary duties.[50] Additionally, Segal noted that his complaint expressly disclaimed any causes of action based on misrepresentation or failure to disclose material facts.[51] The Sixth Circuit held that “[t]he Act does not ask whether the complaint makes “material” or “dependent” allegations of misrepresentation . . . . It asks whether the complaint includes these types of allegations, pure and simple.”[52] The court expressly rejected the Third Circuit’s approach in LaSala, stating that the Third Circuit’s contention that “extraneous allegations” do not operate to require dismissal was only dicta.[53] The Sixth Circuit held that courts must look to the substance of the complaint’s allegations when applying the SLUSA to determine whether there is any inclusion of the type of allegations covered by the SLUSA, regardless of words used, disclaimers made, or whether they are an essential element.[54]

C. The Seventh Circuit’s “Implied Omission” Approach

In Holtz v. JPMorgan Chase Bank, N.A.[55] and Goldberg v. Bank of America, N.A,[56] the Seventh Circuit took a different approach in affirming the dismissals of two class-action lawsuits based on the SLUSA. The plaintiffs in Holtz filed a claim for breach of contract and fiduciary duty alleging that JPMorgan did not disclose to its customers the incentives it gave its employees to favor its own funds over other, potentially more lucrative funds when it promised to invest the petitioners’ money based on an independent, skilled analysis.[57] The Seventh Circuit held that the SLUSA barred the action because the fact that the plaintiffs would lose if the defendant demonstrated that it had disclosed the alleged conduct meant that there was an omission of a material fact.[58] Because the plaintiff’s claim did not arise from an explicit term in the contract, the court construed it as an omission of material fact, rather than a breach of an agreement.[59] The court in Holtz cited its prior opinion, Brown v. Calamos, noting that simply because a claim is a contract and fiduciary claim, that does not mean that it is not also a securities fraud claim if it depends on nondisclosure.[60] The court reasoned that “a plaintiff cannot proceed by omitting the securities theory and standing on state law” in circumstances where the claim relies on the type of allegation described in the SLUSA, regardless of whether the securities theory would be unsuccessful.[61]

In Goldberg, a trustee brought a class action in state court against Bank of America, asserting breach of contract and fiduciary duty for failure to disclose that the bank retained a fee for putting cash balances into mutual funds.[62] The court in Goldberg cited Holtz for the contention that “if a claim could be pursued under federal securities law, then it is covered by the [SLUSA] even if it also could be pursued under state contract or fiduciary law.”[63] As observed by Judge Hamilton in his dissent in Goldberg, the Seventh Circuit’s approach effectively means that all breach of contract claims connected with the sale or purchase of a security will be treated as impliedly alleging an omission and thus falling under the SLUSA unless the breach was by mistake or the decision was made after the contract was formed.[64] This is because the defendant’s mere failure to disclose his plan to engage in the conduct that is alleged to breach the contract will be treated as an omission of material fact.[65]

IV. The Supreme Court Should Adopt the Majority Approach

In his dissent in Goldberg, Judge Hamilton suggested that only the Supreme Court could resolve the interpretive split that currently exists among the federal appellate courts.[66] The Supreme Court, however, has repeatedly denied petitions for writ of certiorari in cases addressing the issue.[67] Goldberg and Holtz, which represent the most recent interpretive expansion of the SLUSA, exemplify how an overly broad application of the statute can result in a preclusion of remedy for plaintiffs with legitimate claims of breach of contract and fiduciary duty that are not viable under federal securities fraud law.[68] The Seventh Circuit’s approach would almost always bar a plaintiff with a systematic breach-of-contract claim against a financial institution because a court can always imply that the counter-party has told the plaintiff something that is not true or has failed to disclose something.[69] Similarly, a breach of fiduciary duty often looks like an “omission of material fact” because part of the duty of loyalty is candor.[70] Moreover, federal law does not provide a remedy for claims alleging breach of fiduciary duty, which are traditional state-law claims.[71] The reach of the SLUSA involves not only questions of statutory interpretation but also federalism concerns.[72] In Rowinski v. Solomon Smith Barney Inc., the court recognized that there should be limits on the SLUSA, stating that the SLUSA should not expand or constrict the “substantive reach of federal securities regulation.”[73] Additionally, the current split among the circuits has created an incentive for forum shopping, with plaintiffs seeking jurisdictions that tend to favor non-preemption.[74] The split has led to the exact opposite of the uniformity that Congress intended when it enacted the PSLRA and the SLUSA.[75]

Rather than attempt to create a new approach, the Supreme Court should recognize the approach taken by the majority of the circuits to provide efficient uniformity. The majority’s approach requires a court to determine (1) whether the complaint’s description of the defendant’s conduct is expressly or impliedly of the kind specified by the SLUSA, and (2) whether the alleged conduct will be part of the proofs in support of the plaintiff’s cause of action, regardless of whether it is an element of that action.[76] If the answer to both of those questions is in the affirmative, the SLUSA would apply to preempt suit. Adopting this approach would be the best way to allow room for legitimate claims of breach of contract and fiduciary duty related to securities law while also giving effect to the objectives of the SLUSA. The majority approach prevents artful pleading because the court looks beyond the language expressly used in the complaint; however, the inquiry is not so searching as to effectively immunize financial institutions from liability in all cases where the financial institution’s breach falls short of securities fraud or simply contains background details relating to misrepresentations.


Despite multiple petitions for writ of certiorari over the past decade, the SLUSA circuit split continues. As litigation increases over insufficient risk disclosures, virus-related misrepresentations, and other pandemic-related issues, the Supreme Court will likely see more writs heading its way. If the Court were to choose to address the interpretive issues with the SLUSA, it may finally put an end to this never-ending interpretive dilemma.


[1] See Amanda Maine, Securities Docket Panelists Weigh in on Enforcement Implications of Covid-19 Pandemic, 772 Corp. Governance Guide 3274118, 2020 WL 3274118 (“[C]ompanies should expect more private securities litigation related to COVID-19 . . . .”).

[2] See Blair Connelly et al., Securities Litigation Trends During COVID-19, Harvard Law School Forum on Corporate Governance (Nov. 7, 2020), [].

[3] Private Securities Litigation Reform Act of 1995 (Reform Act), 109 Stat. 737 (codified at 15 U.S.C. §§ 77z-1, 78u-4).

[4] 15 U.S.C. § 77p(b).

[5] See infra Part III.

[6] See infra Part III.

[7] 15 U.S.C. § 78j(b); 17 CFR § 240.10b-5 (2005). “The Rule, like § 10(b) itself, broadly prohibits deception, misrepresentation, and fraud ‘in connection with the purchase or sale of any security.’” Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 78, (2006).

[8]  See Kardon v. Nat’l Gypsum Co., 69 F. Supp. 512, 514 (E.D. Pa. 1946). The Supreme Court later endorsed this recognition in Superintendent of Insurance of State of N.Y. v. Bankers Life & Casualty Co., 404 U.S. 6 (1971).

[9] See Dabit, 547 U.S. at 81 (“[N]uisance filings, targeting of deep-pocket defendants, vexatious discovery requests, and ‘manipulation by class action lawyers of the clients whom they purportedly represent’ had become rampant in recent years.”).

[10] 15 U.S.C. § 78u-4.

[11] S. Rep. No. 104-98, at 32 (1995), reprinted in U.S.C.C.A.N. 679.

[12] 15 U.S.C. § 78u-4(b)(2); S. Rep. No. 104-98, at 32.

[13] 15 U.S.C. § 78u-4.

[14] See Dabit, 547 U.S. at 82.

[15] Id.; see also 15 U.S.C. § 77p(b).

[16] 15 U.S.C. § 77p(b); see also Segal v. Fifth Third Bank, N.A., 581 F.3d 305, 309 (6th Cir. 2009).

[17] Dabit, 547 U.S. at 86.

[18] Id. at 71.

[19] Id.

[20] Id. at 75.

[21] Id. at 77.

[22] Id. at 85–88.

[23] Id. at 86.

[24] Id.

[25] Id. at 87.

[26] See, e.g., Miller v. Metro. Life Ins. Co., 979 F.3d 118, 122–23 (2d Cir. 2020) (“[R]esolving whether SLUSA presents a jurisdictional bar . . . [is] [f]raught because of the dueling views that this difficult issue has already inspired, leaving our own caselaw uncertain and sister circuits split.”); Brown v. Calamos, 664 F.3d 123, 127 (7th Cir. 2011).

[27] See id.; see also Christopher R. Bellacicco, Putting the “Uniform” Back in the Securities Litigation Uniform Standards Act of 1998: The Case for Employing a Reasonable Relationship Approach, 63 Cath. U. L. Rev. 195, 197 (2013).

[28] See infra Part III.A–D.

[29] See infra Part III.A–D; see also Petition for Writ of Certiorari, Holtz v. JPMorgan Chase Bank, N.A., 138 S. Ct. 170 (2017) (No.16-1536), 2017 WL 2705561 (discussing the different approaches adopted among the circuits).

[30] Goldberg v. Bank of Am., N.A., 846 F.3d 913, 921 (7th Cir. 2017) (Hamilton, J., dissenting); see also LaSala v. Bordier et Cie, 519 F.3d 121 (3d Cir. 2008) (holding that the SLUSA did not apply because the plaintiff did not have to prove any of the allegations of misrepresentations); Northstar Fin. Advisors, Inc. v. Schwab Invs., 904 F.3d 821 (9th Cir. 2018) (holding that “the conduct still must be a fact on which the proof of that state cause of action depends”); In re Kingate Mgmt. Ltd. Litig., 784 F.3d 128 (2d Cir. 2015) (finding that the allegations must form the basis for the defendant’s state law liability).

[31] See LaSala, 519 F.3d 121, Northstar Fin. Advisors, Inc., 904 F.3d 821, In re Kingate, 784 F.3d 128.

[32] LaSala, 519 F.3d 121; Northstar, 904 F.3d 821; In re Kingate, 784 F.3d 128.

[33] See infra Part III.A.2–3.

[34] See, e.g., Brown v. Calamos, 664 F.3d 123, 127 (7th Cir. 2011); Bellacicco, supra note 27, at 208. The Second Circuit has adopted a similar approach. See In re Kingate, 784 F.3d 128.

[35] LaSala, 519 F.3d at 141 (citing and clarifying Rowinski v. Salomon Smith Barney Inc., 398 F.3d 294 (3d Cir. 2005)).

[36] Id.

[37] Id.

[38] Id.

[39] See, e.g., Brown, 664 F.3d at 127.

[40] See Freeman Invs., L.P. v. Pac. Life Ins., 704 F.3d 1110 (9th Cir. 2013).

[41] See Stoody-Broser v. Bank of Am., 442 Fed. Appx. 247, 248 (9th Cir. 2011); see also Brown, 664 F.3d at 127.

[42] See Freeman, 704 F.3d 1110.

[43] Id. at 1115.

[44] Id.

[45] Id. at 1116.

[46] See, e.g., Brown, 664 F.3d at 127; Segal v. Fifth Third Bank, N.A., 581 F.3d 305 (6th Cir. 2009); Atkinson v. Morgan Asset Mgmt., Inc., 658 F.3d 549, 555 (6th Cir. 2011).

[47] See Segal, 581 F.3d 305; see also Atkinson, 658 F.3d 549 (rejecting the plaintiffs’ claim that the SLUSA does not bar relief under state law because they did not claim any actual purchases as a factual predicate to relief). The Fifth Circuit has taken a similar approach. See Miller v. Nationwide Life Ins. Co., 391 F.3d 698, 702 (5th Cir. 2004).

[48] Segal, 581 F.3d at 308.

[49] Id. at 309–10.

[50] Id. at 308.

[51] Id. at 310.

[52] Id.

[53] Id. at 311–12.

[54] Id. The 10th Circuit has also adopted this interpretation. See Anderson v. Merrill Lynch Pierce Fenner & Smith, Inc., 521 F.3d 1278, 1285–86 (10th Cir. 2008).

[55] 846 F.3d 928, 928 (7th Cir. 2017).

[56] 846 F.3d 913 (7th Cir. 2017).

[57] Holtz, 846 F.3d at 932.

[58] See Goldberg, 846 F.3d at 915; Holtz, 846 F.3d at 932.

[59] Holtz, 846 F.3d at 932.

[60] Id.

[61] Id.

[62] Id. at 915.

[63] Goldberg, 846 F.3d at 916.

[64] Id. at 924 (Hamilton, J., dissenting).

[65] Id.

[66] Id. at 922 (“Only the Supreme Court can settle this three- or four-way circuit split”).

[67] See, e.g., Goldberg v. Bank of Am. N.A., 138 S. Ct. 173 (2017) (cert. denied); Brown v. Calamos, 567 U.S. 916 (2012) (cert. denied); Proskauer Rose LLP v. Troice, 133 S. Ct. 404 (2012) (asking the solicitor general to express view and ultimately denying cert); Segal v. Fifth Third Bank, N.A., 560 U.S. 925 (2010) (cert. denied).

[68] See Goldberg, 846 F.3d at 922.

[69] See id.

[70] Id.

[71] See Roland v. Green, 675 F.3d 503, 518 (5th Cir. 2012), aff’d sub nom. Chadbourne & Parke LLP v. Troice, 571 U.S. 377 (2014) (“Notably, state common law breach of fiduciary duty actions provide an important remedy not available under federal law.”).

[72] See Cecilia A. Glass, Sword or Shield? Setting Limits on SLUSA’s Ever-Growing Reach, 63 Duke L. J. 1337, 1369 (2014).

[73] 398 F.3d 294, 299 (3d Cir. 2005).

[74] See Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 82 (2006).

[75] See H.R. Conf. Rep. No. 105-803 (1998), available at 2000 WL 103966.

[76] See Northstar Fin. Advisors, Inc. v. Schwab Invs., 904 F.3d 821, 830 (9th Cir. 2018).