4. What is the “Supremacy Clause” and “Preemption”?
Article VI, Section 2 of the US Constitution provides that the Constitution is supreme over all laws and that federal law is supreme over state law. Generally,the state and federal governments may regulate the same type of conduct. This is known as “concurrent power”. However, any state law that prevents or interferes with the accomplishment and execution of the full purposes and objectives of Congress is invalid. Congress can expressly reserve an entire area of law for federal regulation. In such a case, the federal law “preempts” state law. If Congress does not expressly reserve the area of law for federal regulation, the state may also regulate it. State appellate courts or the US Supreme Court may review a state law and overturn it if it determines that the law conflicts with or violates a federal law.
• Note: Generally the state law can be more restrictive than the federal securities law.
• Example: The Federal Government regulates the immigration process. It expressly preempts states regulating this area of law. The Federal Government also regulates the purchase and sale of securities. States are not preempted from regulating the purchase or sale of securities, but a state law may not conflict with or prohibit the accomplishment of federal law.
• Discussion: Can you think of any recent state laws that were struck down because they conflicted with federal law? Can you think of any areas of law that are regulated by both state and federal law?
• Practice Question: The Federal Government passes a statute that regulates certain business practices. Specifically, it requires businesses to seek federal approval through a licensing process. The law does not include a provision that specifically prohibits states from also regulating this conduct. Arizona determines that it wants to regulate this same activity by states within its borders. So, it passes a state statute that is requires businesses to also seek a state license prior to undertaking the cover practice. Is this permissible? What if the state is far more stringent that the federal statute? Less stringent? Can the state require that a state license issue before a business may apply for a federal license?