California has had its current Bucket Shop Law on the books since 1949. The Bucket Shop Law, among other things, voids all contracts for the purchase or sale of shares without any intention on the part of one party to deliver, and the other party to receive, the shares, and contemplating the payment of the difference between the contract price and the market price. Cal. Corp. Code § 29104. At a general level, bucketing can be viewed as gambling or even insurance.
Although the California Bucket Shop Law has been in existence for more than a half century, there have been only a few reported decisions addressing the law (including a criminal case, People v. Gardner, 72 Cal. App. 3d 641 (1977)). This likely is due to federal preemption.
Section 12(e)(2) of the Commodity Exchange Act (7 U.S.C. § 16(e)(2)) expressly preempts state bucket shop laws as to agreements, contracts or transactions excluded from that act under specified sections of the act. This represents an unusual inversion of preemption. In effect, Congress is telling the states: “If we are not regulating the activity, you can’t either”. Typically, of course, Congress preempts state regulation when the federal government is regulating the activity.
The Dodd-Frank Act amends Section 12(e)(2) of the CEA by striking several of the specified statutes. This change has the effect of eliminating preemption of state bucket shop laws as to agreements, contracts and transactions excluded from the CEA by the deleted sections. Perhaps most notably, Congress has deleted the reference to Section 2(d) in Section 12(e)(2) of the CEA. That section excludes from the CEA agreements, contracts and transactions between “eligible contract participants” (defined in 7 U.S.C. 1a(12)). The Dodd-Frank Act also amended 7 U.S.C. § 27f to eliminate that statute’s preemption with respect to covered swap agreements.
Section 28(a) of the Securities Exchange Act of 1934 (“Exchange Act”) also preempts state bucket shop laws by providing that such laws shall not invalidate any put, call, straddle, option, privilege or other security “subject to this title” or apply to any activity that is incidental or related to the offer purchase, sale, exercise, settlement, or closeout of any such security. This language, which pre-dates the Dodd-Frank Act, is inexplicable. In particular, what makes a security “subject to” the Exchange Act? A narrow interpretation is that a security is subject to the Exchange Act only if it is of a class of securities registered or required to be registered under Section 12 of the Exchange Act. However, some provisions apply to securities regardless of whether they are registered under Section 12. Thus, it might be argued that any security, as defined in Section 3(a)(10) of the Exchange Act, is “subject to” the Exchange Act.
The Dodd-Frank Act doesn’t explain when a security is ”subject to” the Exchange Act, but it does amend Section 28(a) to add any security-based swap between eligible contract participants or any security-based swap effected on a national securities exchange registered pursuant to section 6(b) of the Exchange Act.
Making sense of these amendments is no easy task. However, anyone entering into contracts involving the purchase and sale of shares or commodities that aren’t intended to be settled by actual delivery may want to take a look at California’s Bucket Shop Law and confirm either that it is not engaging in bucketing or that federal preemption still obtains.
