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Pee Pee Pop Trust v. Financial Industry Regulatory Authority, Inc.

United States District Court, D. Nevada

September 26, 2019

PEE PEE POP TRUST, et al., Petitioners,



         I. SUMMARY

         This dispute centers on whether a Nevada state law means that Petitioners are not required to turn over trust documents requested by Respondent the Financial Industry Regulatory Authority, Inc. (“FINRA”) pursuant to its rules. But this order specifically addresses several threshold issues without reaching the merits of the dispute. John Hurry, as trustee of Petitioners Pee Pee Pop Trust, Pee Pee Pop Trust II, Pee Pee Pop Trust III, Man Cub Trust, Man Cub Trust II, and Man Cub Trust III dated July 22, 2013 (collectively, the “Trusts”) filed a petition in Nevada state probate court seeking declaratory and injunctive relief against FINRA. (ECF No. 1-1 (the “Complaint”).) FINRA removed the Complaint to this Court. (ECF No. 1.) Before the Court is FINRA’s motion to dismiss (ECF No. 11), and the Trusts’ competing motion to remand to the state probate court (ECF No. 17).[1] As further explained below, the Court will deny the Trusts’ motion to remand and grant FINRA’s motion to dismiss because the Court finds this case arises under Section 27(a) of the Exchange Act, 15 U.S.C. § 78aa(a) (“Section 27(a)”), and FINRA is immune from suit under these circumstances.


         John Hurry and his wife Justine Hurry (the “Hurrys”) are the trustees of the Trusts. (ECF No. 1-1 at 3.) The Trusts own SCA Clearing LLC and Scottsdale Capital Advisors Holdings, LLC. (Id. at 1.) These entities, in turn, own Alpine Securities Corporation and Scottsdale Capital Advisors Corporation (collectively, the “Corporations”). (Id.) The Corporations are licensed and registered members of FINRA. (Id. at 4.)

         FINRA is threatening to-and temporarily did (ECF Nos. 32, 33, 34, 35)-suspend the Corporations’ FINRA memberships because the Trusts have refused to turn over “complete and detailed information regarding the terms and conditions of the Trusts, and the trust instruments” to FINRA. (ECF No. 1-1 at 7.) Such suspension would harm the Trusts because it would make the Corporations unable to do business. (Id.) The Corporations must be members of FINRA in order to sell securities. (Id. at 4.)

         This dispute started when the Hurrys decided to divide one trust they controlled into the Trusts. (Id. at 3.) FINRA contacted the Corporations about this transaction. (Id. at 4.) The Corporations essentially responded that their ownership had not materially changed, and also provided FINRA with Certificates of Trust In Lieu of Trust Instruments (the “Certificates”), as allegedly permitted under NRS § 164.400, et seq., to provide FINRA with information about the Trusts. (Id. at 3-4.) FINRA deemed the Certificates inadequate, and demanded to see “all provisions of the Trusts, and be provided with copies of all the trust instruments, ” which the Trusts and Corporations contend is “in direct contravention of Nevada law.” (Id. at 5.) Thus, FINRA insists on full disclosure of information about and the documents governing the Trusts upon threat of suspension of the Corporations’ FINRA memberships, which the Trusts contend violates Nevada law. (Id.)

         The Trusts characterize FINRA’s actions as “not required, demanded or even permitted under its own operating rules and procedures, ” arguing that the disclosures FINRA seeks undermine Nevada’s public policy of protecting trust confidentiality and violate the terms of the Trusts themselves, which allegedly preclude such disclosure without a court order. (Id. at 5-6.) The Trusts assert that the Nevada state probate court has jurisdiction over this controversy under NRS § 164.010, and seek an order from that court that: (1) the Trusts and Corporations are not obligated to provide FINRA with the information it seeks, both generally and until the court adjudicates their claim; and (2) “an order enjoining and restraining FINRA from terminating or suspending Petitioners [sic] membership in FINRA until such time as the court has determined the rights and obligations of the Parties.” (Id. at 6-8.)

         FINRA removed the case to this Court, contending the Court has federal question jurisdiction under Section 27(a), and this Court may exercise supplemental jurisdiction over the declaratory judgment claim to the extent it is based on state law. (ECF No. 1 at 4.) FINRA alternatively contends this Court has diversity jurisdiction over the case. (Id. at 4-5.) As mentioned, FINRA then moved to dismiss, and the Trusts moved to remand.


         The Court will address FINRA’s motion to dismiss and the Trusts’ motion to remand together because the parties’ arguments in both motions largely overlap. Generally speaking, the parties agree this case should not proceed before this Court, but disagree as to whether it should be dismissed or remanded. As further explained below, the Court is persuaded by FINRA’s argument this case should be dismissed. (ECF No. 22.) The Court first addresses below its jurisdiction over this case, and then addresses FINRA’s immunity from suit under these circumstances.

         A. Jurisdiction

         Section 27(a) “provides federal district courts with exclusive jurisdiction ‘of all suits in equity and actions at law brought to enforce any liability or duty created by [the Exchange Act] or the rules and regulations thereunder.’” Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning, 136 S.Ct. 1562, 1568 (2016) (citing 15 U.S.C. § 78aa(a)). It thus confers “exclusive federal jurisdiction of the same suits as ‘aris[e] under’ the Exchange Act pursuant to the general federal question statute.” Id. at 1567 (citation omitted). That means: (1) “federal jurisdiction attaches when federal law creates the cause of action asserted[, ]” or (2) “a federal court has jurisdiction of a state-law claim if it ‘necessarily raise[s] a stated federal issue, actually disputed and substantial, which a federal forum may entertain without disturbing any congressionally approved balance’ of federal and state power.” Id. at 1569-70.

         As further explained below, the Court finds that the Trusts’ Complaint falls into the second category. Although it invokes state law as the basis for relief, the Complaint “is on its face a challenge to FINRA’s application of its internal rules in exercising its regulatory authority under the Exchange Act.” Turbeville v. Fin. Indus. Regulatory Auth., 874 F.3d 1268, 1274 (11th Cir. 2017); see also Id . at 1273 (affirming the district court’s denial of the plaintiff’s motion to remand to state court, along with its decision to grant FINRA’s motion to dismiss, holding that “suits against SROs like FINRA for violating their internal rules ‘arise under’ the Exchange Act of 1934 and therefore fall under the Act’s grant of exclusive jurisdiction to the federal district courts[, ...

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