The U.S. Securities Industry Association filed suit in federal court Friday to overturn legislation in Utah dealing with short selling.

The SIA is seeking to overturn the law that requires broker-dealers to inform that state’s Division of Securities when there is a “failure to deliver” securities issued by Utah companies that are traded on national markets. In the suit, SIA argues the Utah legislation illegally usurps the jurisdiction of the Securities and Exchange Commission and is expressly preempted by federal securities law. As part of its complaint, SIA is seeking a temporary restraining order and has requested a permanent injunction prohibiting the application of the law.

The Utah law would affect transactions after October 1, the SIA notes. “Despite the fact that it is intended to regulate ‘naked’ or uncovered short selling, the new regulatory requirements are not narrowly tailored to address only instances of ‘naked’ or uncovered short selling. Rather, the law applies to all ‘fails to deliver’, including covered short selling and purchases of a stock when the buyer expects the price to rise,” it says.

The law imposes severe penalties against any Utah licensed broker-dealer that does not report “fails to deliver” on identified Utah companies, it adds. “The law specifies these reports include a variety of information about the fails, but in some cases the systems required to locate and report the information is simply unavailable. If the information were available, following the reporting requirements could breach the privacy expectations of a broker-dealer’s customers. The law also creates a private right of action for Utah issuers, enabling them to sue and collect substantial damages from any broker-dealer that violates the law, regardless of fault or whether the Utah company was actually harmed,” the SIA says.

“On this issue, federal law could not be more explicit: the states are expressly prohibited from establishing operational or record-keeping requirements that are different from the requirements of the Securities Exchange Act,” said Marc Lackritz, president of SIA. “If each state is granted the authority to set its own rules, the resulting labyrinth of regulation would choke our financial markets. Already, companies launching IPOs shop globally for more accommodating regulatory environments. Allowing each state to add its own regulatory regime would only exacerbate this growing problem, further reducing the competitiveness of U.S. financial markets.”