Metropolitan News-Enterprise


Wednesday, April 10, 2013


Page 1


Court Upholds Brokers’ Restrictions on Workers’ Outside Trading




Federal law gives securities brokers the right to enact rules barring their employees from maintaining accounts with other brokerages, preempting any conflicting state laws, the Ninth U.S. Circuit Court of Appeals ruled yesterday.

Ruling on consolidated appeals, the panel affirmed rulings by three district judges in favor of brokerages that were sued in employee class actions.

The employees, who filed four separate class actions in 2009, cited Labor Code Sec. 450(a), which bars employers from forcing their workers to patronize the employer “in the purchase of anything of value.” But the district and appellate judges all agreed that applying state law in the manner asserted by the plaintiffs would be an obstacle to the congressional objective of deterring “harmful or unfair trading practices” by giving brokerage firms broad discretion to monitor their employees’ activities.

O’Scannlain Opinion

Judge Diarmuid O’Scannlain, writing for the Ninth Circuit, explained that the defendants—Wells Fargo, Morgan Stanley Smith Barney, Merrill Lynch, and Bank of America—generally allowed employees to maintain money market and mutual fund accounts outside the firms, but barred outside directed trading in stocks in order to deter insider trading and similar abuses.

The plaintiffs argued that Sec. 450(a) is not a significant obstacle to the congressional objective because it merely limits employers’ “choice of supervisory methods.” They contended that the brokerages can still deter abuses, they just cannot do it by barring employees from having outside accounts.

O’Scannlain, however, said Congress intended to allow the brokerages “to decide for themselves how best to monitor their employees’ trading, suggesting that individually tailored policies serve as ‘an important means for achieving’ the [Securities Exchange] Act’s basic goal of reducing insider trading. “

No Free Ride

The jurist also rejected the contention that employers can avoid violating the state statute by giving their employees free accounts. This is “[n]ot so,” O’Scannlain said, because the statute “forbids mandatory ‘free’ accounts just as it forbids paid ones.”

An employer, he explained, can violate Sec. 450(a) in either of two ways—forcing the employee to buy the company’s products, or to purchase a third party’s goods through the company.  “As the firms point out, a “free accounts” policy would amount to forced patronage of this second sort: were Morgan Stanley to compel employees interested in self-directed trading to open their accounts in house, it still would force them to use Morgan Stanley in the purchase of goods (here, securities), regardless of whether Morgan Stanley charged its typical fees,” the judge wrote.

Attorneys who argued the appeal were Maxwell M. Blecher of Blecher & Collins, P.C. in Los Angeles and Marc Thierman of Reno, Nev. for the plaintiffs and Malcolm A. Heinecke of Munger, Tolles & Olson LLP’s San Francisco office and E. Joshua Rosenkranz of Orrick, Herrington & Sutcliffe LLP’s New York office for the defendants.

The case is McDaniel v. Wells Fargo Investments, LLC, 11-17017.


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