SEC V. NATIONAL SECURITIES, INC., 393 U. S. 453 (1969)

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U.S. Supreme Court

SEC v. National Securities, Inc., 393 U.S. 453 (1969)

Securities and Exchange Commission v. National Securities

No. 41

Argued November 18-19, 1968

Decided January 27, 1969

393 U.S. 453


The Securities and Exchange Commission (SEC) brought suit against respondent National Securities and persons associated with it, alleging violations of § 10(b) of the Securities Exchange Act and of SEC's Rule 10b-5, arising out of misrepresentations and omissions of material facts in communications sent to shareholders of Producers Life Insurance Co., in an attempt to secure approval of a merger between that company and an insurance firm controlled by National Securities. SEC's request for temporary relief was denied, and thereafter Producers' stockholders approved the merger and the Arizona Director of Insurance found the merger not "[i]nequitable to the stockholders of any domestic insurer," and not otherwise "contrary to law," as he was required to do under the state insurance laws. The merger was consummated, and the SEC then amended its complaint to seek additional relief, including unwinding the merger. The trial court dismissed the complaint, and the Court of Appeals affirmed on the basis that § 2(b) of the McCarran-Ferguson Act barred relief. That section provides that

"[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance . . . unless such Act specifically relates to the business of insurance. . . ."


1. Arizona's statutory regulation, insofar as it applies to the relationship between insurance companies and their shareholders, does not come within the scope of the McCarran-Ferguson Act, and does not render the federal securities laws inapplicable. Pp. 393 U. S. 457-461.

(a) The Act did not purport to make the States supreme in regulating all the activities of insurance companies, but was concerned with laws regulating the business of insurance, and focused on the insurance company-policyholder relationship. Pp. 393 U. S. 459-460. chanrobles.com-red

Page 393 U. S. 454

(b) Arizona is attempting here to regulate the company-stockholder relationship, which is securities regulation, and not within the purview of the Act. P. 393 U. S. 460.

(c) State regulation of insurance company securities does not preempt federal regulation. P. 393 U. S. 461.

2. The Act does not bar the remedies, including return to the status quo ante which the SEC is seeking, as the complaint is based on fraudulent misrepresentations, and not on the illegality of the merger; any "impairment" of the state insurance laws is very indirect; and the paramount federal interest in protecting shareholders is perfectly compatible with the paramount state interest in protecting policyholders. Pp. 393 U. S. 461-464.

3. The deception alleged here has affected stockholders' decisions in a way not unlike that involved in a typical cash sale or share exchange, and, in light of the broad anti-fraud purposes of § 10(b) of the Securities Exchange Act and SEC Rule 10b-5, which apply "in connection with the purchase or sale of any security," exchanges by Producers' shareholders of their old stock for shares in the new company are "purchases" within the meaning of that statutory language. Pp. 393 U. S. 465-468.

4. The fact that § 14 of the Securities Exchange Act and the rules issued thereunder, which apply to proxy situations, may overlap the coverage of § 10(b) and Rule 10b-5, does not bar the application of Rule 10b-5, which is concerned with misrepresentations in the purchase and sale of any security, and includes misstatements in proxy materials. Pp. 393 U. S. 468-469.

387 F.2d 25, reversed and remanded.


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