therefore must first decide whether the simple fact that the Exchange's rules are predicated on provisions of the Act creates a substantial question of federal law sufficient to confer jurisdiction. Second, the court also considers whether the Petries even have a private right of action under the Act so as to create federal jurisdiction over their claims.
First, the court concludes that the interpretation and investigation of the Exchange's rules does not confer federal question jurisdiction over the Petries' claims even though those rules were promulgated under the Act's authority. The rules of a securities exchange are generally considered to be contractual in nature and do not necessarily create a federal question. See Merrill Lynch, Pierce, Fenner, & Smith, Inc. v. Georgiadis, 903 F.2d 109, 113 (2nd Cir. 1990) (reviewing rules of American Stock Exchange). Furthermore, numerous federal courts have considered the issue of whether the interpretation of the rules promulgated by bodies created under the authority of the Act creates a substantial question of federal law, and found that it does not. See, e.g., In re Prudential Securities, Inc., 795 F. Supp. 657, 659 (S.D.N.Y. 1992); Ford v. Hamilton Investments, Inc., 29 F.3d 255, 259 (6th Cir. 1994); Lange v. H. Hentz & Co., 418 F. Supp. 1376, 1379 (N.D. Tex. 1976) (NASD rules not a federal question within meaning of 28 U.S.C. § 1331); Blue Water Fabricators, Inc. v. First of Michigan Corp., 1988 WL 126568, *3 (E.D.Mich. July 14, 1988) (neither New York Stock Exchange rules nor the Act provide jurisdiction under 28 U.S.C. § 1331); Smith Barney v. Painters Local Union No. 109 Pension Fund, 976 F. Supp. 1293, 1996 WL 914015 (D.Neb. 1996) (citations omitted).
For instance, in Lange, the rules of the arbitration board of the National Association of Securities Dealers ("NASD"), a private association of securities dealers created under section 6(b) of the Act, 15 U.S.C. § 78f, were found not to give rise to federal question jurisdiction "despite [NASD] owing its existence and in large measure its power and prestige to the SEC." Lange, 418 F. Supp. at 1379. Rather, the Lange court concluded that the NASD was only a "private association governed by its own rules as developed and applied by its own members." Id. at 1379. After an exhaustive analysis of the phrase "rules and regulations" contained in section 27 of the Act, the court concluded that section 27 did not broadly provide for federal jurisdiction over breaches of the "rules of the [securities] exchange" created under the Act. Id.
The Exchange is no different from other securities exchanges and bodies, like NASD and NYSE, which maintain arbitral forums to resolve disputes between their members and other individuals. The Petries' right to relief does not turn on the resolution of any substantial rule or regulation promulgated under the Act. Rather, all that is required to resolve the Petries' claims is an interpretation of the rules of the Exchange and the submission agreements between the parties. These questions are contractual in nature, and do not create federal question jurisdiction.
Nonetheless, the Exchange argues that the question of whether it has violated the duties imposed by section 19 of the Act confers federal question jurisdiction since section 27 of the Act vests the federal courts with exclusive jurisdiction over violations of the Act. In the same breath, the Exchange argues that the Act does not expressly or implicitly provide the Petries with a private right of action for violations of securities association rules.
It is true that section 27 of the Act vests the federal courts with exclusive jurisdiction over any alleged violations of the Act. 15 U.S.C. § 78aa. Although section 27 grants jurisdiction to the federal courts, the Ninth Circuit has clearly held that this provision does not expressly authorize private actions for stock exchange rule violations. In Re Verifone Securities, 11 F.3d 865, 870 (9th Cir. 1993) (reporting rules of NYSE, NASD and AMEX do not support private right of action); Jablon v. Dean Witter, 614 F.2d 677, 679 (9th Cir. 1980). Rather, the "source of plaintiffs' rights must be found, if at all, in the substantive provisions of the 1934 Act which they seek to enforce, not in the jurisdictional provision." Jablon, 614 F.2d at 680 (quoting Touche Ross & Co. v. Redington, 442 U.S. 560, 577, 61 L. Ed. 2d 82, 99 S. Ct. 2479 (1979)). "The lack of a private right of action counsels against a finding of federal question jurisdiction." Barbara v. New York Stock Exchange, Inc., 99 F.3d 49, 54-55 (2nd Cir. 1996).
Although the Ninth Circuit has not addressed the issue of whether section 19 of the Act provides a plaintiff with a private right of action, other jurisdictions have held that the Act does not create a private right of action for plaintiffs. For instance, in Raymond James & Assoc., Inc. v. National Association of Securities Dealers, Inc., 844 F. Supp. 1504, 1507-08 (M.D.Fla. 1994), the plaintiff contended that the defendant NASD violated section 19(g)(1) of the Act,
15 U.S.C. § 78s(g)(1), by not complying with its own rules. The court, however, found that section 19 did not create an implied private right of action, and that, therefore, no federal question arose under section 19 of the Act. Id. Similarly, the Barbara court found no private right of action under the Act although the plaintiff's complaint made factual allegations that the New York Stock Exchange violated its internal rules. Barbara, 99 F.3d at 54. In so doing, the court held that there was no federal question jurisdiction because the rules of a securities exchange should be interpreted "pursuant to ordinary principles of contract law," an "area in which the federal courts have no special expertise." Id. at 54-55. See also Feins v. American Stock Exchange, Inc., 81 F.3d 1215, 1219-21 (2nd Cir. 1996); Carapico v. The Philadelphia Stock Exchange, 1994 U.S. Dist. LEXIS 1667, 1994 WL 50295, *2 (E.D.Pa. Feb. 14, 1994), aff'd, 43 F.3d 1460 (3rd Cir. 1994).
The Exchange would like to have it two ways: they would first like to secure federal question jurisdiction through the Act, and then they would like to dismiss this action based on the fact that the Petries have no private right of action for violations of the Exchange's rules. The case law, however, clearly shows that the Petries have no private right of action in enforcing the Exchange's internal rules under the Act. Furthermore, as demonstrated by the case law discussed above, their claims here raise no substantial question of federal law. As such, the Petries would have no right to relief in the federal courts under the Act. Since the Petries' complaint could not originally have been brought in the federal courts, the court cannot exercise removal jurisdiction over this action. Finally, the court cannot exercise federal question jurisdiction over this action simply based on the fact that the Exchange invokes the Act to assert defenses to the Petries' claims. See Caterpillar, 482 U.S. at 393.
Because the Exchange has failed to fulfill its burden of establishing federal jurisdiction, the court finds that it cannot exercise federal question jurisdiction over this action. As the court finds that it cannot exercise subject matter jurisdiction over this dispute, it does not reach the issue of whether the Petries have failed to state a claim under Rule 12(b)(6) or for a judgment on the pleadings under Rule 12(c). The Exchange's motion to dismiss is hereby DENIED and this matter is hereby REMANDED.
The Clerk of Court shall transmit forthwith a certified copy of this order to the Clerk of the Superior Court for the County of San Francisco.
IT IS SO ORDERED.
October 24, 1997
MARILYN HALL PATEL
United States District Judge
Northern District of California