DONALD M. MIDDLEBROOKS, United States District Judge
THIS CAUSE comes before the Court upon Plaintiffs Motion for Remand, filed on October 23, 2000 (DE#4). This Court has reviewed the file and submissions of counsel, and is advised in the premises. For the following reasons, Plaintiff's motion is DENIED.
I.
Defendant, the National Association of Securities Dealers (NASD), is a private non-profit corporation and self-regulating organization registered with the Securities and Exchange Commission (SEC) as a national securities association pursuant to the Maloney Act Amendments of the Securities and Exchange Act (SEA), 15 U.S.C. § 78 et seq. Defendant, NASD Regulation, Inc., ("NASD Regulation") is a wholly-owned regulatory subsidiary of the NASD responsible for the regulation of over-the-counter securities. NASD Regulation enforces all NASD rules, including conduct rules. The NASD is the nation's largest self-regulatory organization, regulating the broker/dealer industry and the NASDAQ Stock Market. Plaintiff, Whitehall Wellington Investments, Inc. ("Whitehall"), is a registered broker/dealer and a NASD member since 1995. As a NASD member firm, Whitehall is obligated to comply with all NASD rules and regulations.
Although the NASD is a non-governmental agency, it is subject to SEC oversight. The NASD must file all proposed rules with the SEC prior to implementation. Once proposed, the rules must be approved by the SEC. To approve a rule, the SEC must determine that the proposed rule is consistent with the purposes of the Securities Exchange Act. The SEC may abrogate or amend NASD rules at any time. See 15 U.S.C. § 78s(c). Interested persons may submit comments concerning proposed NASD rules to the SEC. See 15 U.S.C. § 78s(b). Judicial review of SEC approved NASD rules are limited exclusively to the United States Courts of Appeal. See 15 U.S.C. § 78y.
In 1997, following an initial proposal and comment period from its members, the NASD filed a proposed rule, NASD Rule 3010 (the "Taping Rule"), with the SEC, and public comment was invited. This Rule requires the tape recording of conversations by firms that hire more than a specified percentage of registered persons who previously have been expelled from the NASD or have had their broker/dealer's registration revoked for sales practice rules violations. The Taping Rule was designed to prevent reoccurrences of NASD rules violations by prior offenders. On April 17, 1998, the SEC approved the proposed rule.
Since December 3, 1999, Whitehall has challenged the Taping Rule's enforcement to its operations. Under the Rule, Whitehall is required to establish supervisory procedures, including the installation of a taping system to record conversations between Whitehall's registered persons and potential or actual customers, for its telemarketing activities. On January 12, 2000, Whitehall applied for an exemption from this Rule. This request was denied by the NASD on March 14, 2000. The NASD's decision was upheld on administrative appeal by the NASD Regulation National Adjudication Council ("NAC") on June 19. 2000. On July 6, 2000, Whitehall applied to the SEC for review of the NASD's denial of an exemption, and a stay pending review. Whitehall's request for a stay was denied on July 18, 2000. The SEC has not yet determined if they have jurisdiction to review the NAC's decision. In addition, on July 6, 2000, Whitehall also applied again to the NASD for an exemption to the Taping Rule. This request was denied on September 20, 2000. At present, Whitehall has yet to comply with the requirements of the Taping Rule.
On September 28, 2000, Whitehall filed this action against Defendants in the Circuit Court of the Eleventh Judicial Circuit of Florida in and for Miami-Dade County, seeking a declaratory judgment under Florida law that the Taping Rule violates the Florida Security of Communications Act, Florida Statutes, § 934, and injunctive relief from complying with the Rule in violation of Florida law. On October 16, 2000, Defendants removed this case to federal court pursuant to 28 U.S.C. § 1441 (the "removal statute") and 28 U.S.C. § 1446. Whitehall now requests that this case be remanded back to state court because their complaint asserts a pure state law claim — namely, that the NASD's interpretation and/or application of the Taping Rule violates Florida wiretapping law, § 934. Defendants respond that Whitehall's suit, by challenging the applicability of an NASD regulation, raises a substantial federal question. Defendants also contend that because the NASD regulation clearly arose in the NASD's fulfillment of its obligations created by the Securities Act of 1934 and the rules and regulations thereunder, federal jurisdiction is not merely original, but exclusive, under Section 78aa of Title 15, United States Code.
The removal statute provides that any civil case filed in state court may be removed by the defendant to federal court if the case could have been brought originally in federal court. See 28 U.S.C. § 1441 (a).
II.
As a general rule, an action is removable to federal court only if it might have been brought there originally. See 28 U.S.C. § 1441 (a)-(b). Federal district courts have original jurisdiction in all civil actions "arising under the Constitution, laws, or treaties of the United States." 28 U.S.C. § 1331. In addition, federal district courts also are given exclusive subject matter jurisdiction for suits involving the violation of Securities Exchange Act or regulations or rules promulgated thereunder or suits "brought to enforce any liability or duty created" by the Securities Exchange Act or regulations or rules promulgated thereunder. See 15 U.S.C. § 78aa. Unless removal is expressly provided by statute, the availability of removal is limited by the "well-pleaded complaint rule," which permits removal only when a federal question is presented on the face of a properly-pleaded complaint. See Oklahoma Tax Comm'n v. Graham, 489 U.S. 838, 840 (1989); Franchise Tax Bd. v. Construction Laborers Vacation Trust, 463 U.S. 1, 103 (1983) (citing Taylor v. Anderson, 234 U.S. 74, 75-76 (1914)). An anticipated federal defense such as preemption, is not sufficient to confer federal jurisdiction. See Phillips Petroleum Co. v. Texaco, Inc., 415 U.S. 125, 127 (1974). However, notwithstanding the absence of federal question allegations on the face of a complaint, a federal court must retain jurisdiction if the complaint is "artfully pleaded" so as to omit necessary federal questions in an attempt to defeat removal, but the complaint actually involves a substantial question of federal law. See Rivet v. Regions Bank of Louisiana, 118 S.Ct. 921, 925 (1998) (explaining that the "artful pleading doctrine allows removal where federal law completely preempts a plaintiff's state-law claims").
This provision reads in part:
The district courts of the United States, and the United States courts of any Territory or other place subject to the jurisdiction of the United States shall have exclusive jurisdiction of violations of this chapter or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations thereunder.
Id.
In this case, Whitehall asserts that its complaint does not raise a question of federal law. Instead, Whitehall argues that its complaint merely seeks a state declaratory judgment (and corresponding injunctive relief) as to whether the NASD's particular application of the Taping Rule to Whitehall forces Whitehall to violate Section 934. Whitehall further contends that its suit does not allege that the NASD violated any of its internal rules or procedures nor any federal law (such as the SEA) in its interpretation and application of the Taping Rule. In response, Defendants contend that Whitehall's complaint is "artfully pleaded" to avoid federal questions essential to their suit. Specifically, Defendants argue that Whitehall's suit implicitly alleges that NASD Regulation violated NASD Rules in its interpretation and application of the Taping Rule — thereby triggering federal jurisdiction.
After carefully reviewing Plaintiff's complaint, this Court finds that removal was proper as there is federal jurisdiction over Plaintiff's suit. Numerous federal courts have found removal proper where a state law suit alleges that the NASD violated its own rules or regulations during the exercise of its regulatory functions. Whitehall does not disagree with this proposition as a matter of law. Instead, Whitehall attempts to distinguish these cases by arguing that its complaint does not allege that the NASD's interpretation of the Taping Rule is at odds with NASD rules or bylaws or federal law. However, this assertion is unpersuasive when Plaintiff's allegations are examined closely
See. e.g., Sparta Surgical Corp. v. NASD, 1996 WL 556944 (N.D. Cal.) (stating that "Sparta's state common law claims are actually predicated upon NASD rule violations and thus establish a basis for federal jurisdiction"); Hibbard Brown Co., v. NASD, 1994 WL 827778 (D.Del.) (recognizing that "any failure by NASD to comply with its By-Laws constitutes a violation of the Act" and that "[p]ursuant to Section 78aa of Title 15, United States Code, `exclusive jurisdiction of violations of' the Act is vested in the federal courts").
Whitehall's complaint unambiguously asserts that Defendants' interpretation and application of the Taping Rule to Whitehall violates Florida wiretapping law, Section 934. In its complaint, Whitehall alleges that the "NASD and NASD Regulation have sent notification to Whitehall demanding it to institute the Taping Rule in clear violation of Section 934, Florida Statutes by requiring Whitehall and its registered persons to tap record at all times all conversations with all of Whitehall's existing clients and potential clients, many of whom are citizens of the State of Florida, prior to consent to record, if any is given, and without regard to obtaining their consent as required by Section 934, Florida Statutes." Whitehall also alleges that NASD and NASD Regulation "contend that the Taping Rule should be enforced against Whitehall irrespective of whether it violates Section 934, Florida Statutes. . . ." Whitehall then states that it is "in doubt about Whitehall's rights under Section 934, Florida Statutes, and the power of Defendant NASD and NASD Regulation to demand that Whitehall comply with the Taping Rule, regardless of whether such compliance violates Section 934, Florida Statutes." These allegations are the gravamen of Whitehall's suit.
While Plaintiff argues that these allegations only raise an issue of state law, it is clear that these allegations essentially accuse the NASD and NASD Regulation of violating their own stated practices, rules, and bylaws. Defendants' own commentary and practices plainly state that the Taping Rule requires members to comply with federal and state wiretapping laws. In its notification to members such as Whitehall of the proposed Taping Rule, the NASD explained that "in complying with this Rule, they must comply with federal and state civil and criminal statutes governing the tape recording of conversations." See NASD Notice to Members 96-59 (September 1996). In fact, as Whitehall argues in its submissions to this Court, "the clear and ambiguous wording of the Taping Rule states that `[i]n complying with the Taping Rule, members must comply with Federal and State civil and criminal statutes governing the tape recording of conversations.... Finns would be required to independently determine that state laws are satisfied.'" Plaintiff's Memorandum of Law at 7 (quoting NASD Notice to Members 98-52). Therefore, Whitehall's allegation that Defendants' interpretation and/or application of the Taping Rule violates Florida law is more than a state law claim. It also necessarily is a claim that Defendants' interpretation and application of the Taping Rule is in conflict with the Taping Rule itself as well as Defendants' stated practices and commentary regarding the Rule.
As such, this Court concludes that Plaintiff's complaint includes factual allegations which confer federal jurisdiction over this suit. Defendants approved, interpreted, and applied the Taping Rule in its regulatory capacity pursuant to federal law — namely, the SEA and various other securities provisions codified at 15 U.S.C. § 78 et seq. Section 78(g)(1) of Title 15, United States Code requires "[e]very self-regulatory organization [such as the NASD] to comply with . . . its own rules." Further, pursuant to Section 78aa of Title 15, United States Code, "exclusive jurisdiction of violations" of this law is vested in the federal courts. As a result, Whitehall's claim that Defendants violated its own rules and practices in interpreting and applying the Taping Rule is subject to federal jurisdiction. See Hibbard Brown Co. v. NASD, 1994 WL 827778 (D. Del. 1994). As the Lowe Court explained in a related context:
Although the Plaintiffs' complaint is careful to allege only state law claims, each claim is predicated on the NASDR's violation of its own rules. Without explicitly pleading so, the Plaintiffs are seeking to enforce the duty to follow its own Rules of Arbitration, which is a duty imposed by the Exchange Act. Any judicial interpretation of what the NASD Rules of Arbitration mean requires a court to determine whether the Defendant violated § 78s of the Exchange Act. Such a determination is explicitly conferred by statute to federal courts.
If NASDR violated its own rules. it breached federal law.
Lowe v. NASDR,
1999 WL 1680653 at 3 (D.D.C. 1999) (citation omitted) (emphasis added).
This Court agrees that Plaintiff's claim that Defendants violated the Taping Rule as well as their own commentary and practices in their interpretation and/or application of the Rule amounts to a claim that Defendants breached a "liability" or "duty" under the terms of Section 78aa of Title 15, United States Code.
Moreover, in order to adjudge the merits of Plaintiff's claims, it is essential to interpret the substance of the Taping Rule as well to decide if Defendants' interpretation and application of the Rule failed to comply with the terms of the Rule itself. For these reasons, federal subject matter jurisdiction exists in this case.
See also Sparta, 1997 WL 50223 at 3 (finding federal removal proper because "issues of NASD rule violations underlie the state common law claims); Coleman v. NASD, 1999 WL 305100 at 1 (S.D.N.Y. 1999) (finding federal removal proper because federal courts have exclusive jurisdiction over allegations that NASD "violated its internal rules").
The Fifth Circuit has reached the same conclusion in a suit in which plaintiffs sued the NASD, in part, for violating its Rules of Arbitration Procedure:
All of Hawkins's allegations against the NASD may be categorized as an attempt to `enforce any liability or duty' created by relevant federal securities laws and regulations. To the extent that Hawkins claims that the NASD breached duties it owed to Hawkins in its role as arbitrator, those duties arise from the NASD Code of Arbitration Procedure, which is a body of rules approved by the Securities and Exchange Commission and promulgated under
15 U.S.C. § 78s.... In short, all of Hawkins's claims against the NASD, though carefully articulated in terms of state law, are actions at law seeking to enforce liabilities or duties created by federal securities laws which are governed exclusively by federal courts pursuant to
15 U.S.C. § 78aa.
Hawkins v. NASD, 149 F.3d 330, 331-32 (5th Cir. 1998).
III.
In light of the foregoing, it is
ORDERED AND ADJUDGED that Plaintiff's motion for remand is DENIED. It is further ORDERED that Plaintiff shall have twenty days from the date of this order to respond to Defendants' motion to dismiss. Related motions (DE#5 and 10) are DENIED AS MOOT.
DONE AND ORDERED in Chambers, at Miami, Florida, this 7th day of December 2000.