Opinion ID: 769370
Heading Depth: 2
Heading Rank: 3

Heading: The SEC's Amicus Brief

Text: 19 The Press and Strougo plaintiffs separately appealed from the judgments of the district court. Their appeals were jointly argued before this Court on May 10, 1999. On October 29, 1999, the Court sent a letter to the SEC requesting that it submit an amicus curiae brief expressing the Commission's views on the issues set forth in the [parties'] briefs, specifically the distribution and advisory fee disclosure requirements under Rule 10b 10. 20 On February 14, 2000, the SEC submitted identical amicus briefs for each appeal. The SEC stated in its amicus brief that, as the SEC understood the Court's request, the brief would respond to the following question: 21 Whether the [prospectus and SAI] disclosures that were made about [the fee] payments failed to comply with Rule 10b-10, which requires broker-dealers to disclose the amount of remuneration they receive from third parties in connection with customer transactions. 22 SEC Brief at 1. 23 The SEC began its analysis by reciting the purpose of Rule 10b-10's disclosure requirements. The SEC stated: In pertinent part, Rule 10b-10 requires a broker-dealer to disclose to its customers any remuneration it receives from third parties in connection with a customer transaction so that the customers are aware of the existence and extent of any conflict of interest that the broker-dealer has. SEC Brief at 9. 24 The SEC then stated its agreement with the district court's conclusion that Rule 10b-10 requires disclosure of fees calculated on the basis of a fund's assets, i.e., the fees at issue here. The SEC focused on Rule 10b-10's language requiring disclosure of third-party remuneration in connection with the transaction and concluded that such language easily reaches fees like those in this case that are not calculated on a per transaction basis. SEC Brief at 17 (quoting Rule 10b-10(a)(2)(i)(D)). The SEC observed that the fees [at issue here] plainly are 'in connection with the transaction;' without the transaction, there would be no fees. 8 Id. In addition, the SEC noted that limiting Rule 10b-10 to cover only per-transaction fees, as the defendants advocated, would be inconsistent with Rule 10b-10's purpose of giv[ing] customers relevant information about conflicts of interest that third-party payments create on the part of the broker-dealers. Id. at 18-19. Such a limitation on Rule 10b-10's scope, the SEC concluded, would frustrate that purpose because conflicts of interest are the same whether the amount paid is based on specific transactions, average assets invested, or any other basis, and the payments therefore should be disclosed. Id. at 19. 25 Having found that Rule 10b-10 applies to the fees at issue here, the SEC noted that although the broker-dealer defendants made no direct disclosures about the fees, defendants could rely on the disclosures in the fund prospectuses and SAIs to satisfy their Rule 10b-10 obligations. See SEC Brief at 24; see also id. at 10 ([A]s a general principle[,] delivery of a prospectus containing sufficient disclosure can satisfy a broker-dealer's obligations under Rule 10b-10.). In support of this proposition, the SEC pointed out a footnote to the adopting release for Rule 10b-10, which states that, if information required by Rule 10b-10 is contained in a prospectus for the fund in which the customer's money is invested, a broker-dealer is not required to repeat such information in the periodic confirmation statements it sends to the customer. See SEC Brief at 24 (citing Securities Confirmations, Exchange Act Release No. 13508, {1977-1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 81,143, at 87,931 n.41 (May 5, 1977)). 9 26 But in evaluating the adequacy of the disclosures in the fund prospectuses and SAIs, the SEC rejected the district court's conclusion that those public filings fail to satisfy defendants' Rule 10b-10 obligations. The SEC explained that the district court erred at the outset by relying on the SEC staff's 1979 No-Action Letter. 10 According to the SEC, the 1979 No-Action Letter was concerned solely with disclosures of charges paid by the customer. SEC Brief at 21. The SEC further explained that because payments made to broker-dealers by third parties are not charges paid by the customer, the 1979 No-Action Letter's requirement that the precise amount of such charges be disclosed does not apply to the fees at issue here. See id. 27 The SEC stated, moreover, that the precise amount requirement for disclosure of charges paid by the customer is not applicable to disclosure of third-party remuneration, because the purposes of the respective disclosures are fundamentally different. The SEC explained that the precise amount of customer charges should be disclosed because the customer is paying those charges and must be able to determine exactly how much they are. Id. By contrast, the SEC reiterated that the purpose of disclosing third-party remuneration received by a broker-dealer is to inform customers of the nature and extent of a broker-dealer's conflict of interest, and, therefore, disclosure with precision is not necessary with respect to those types of payments. Id. 28 The SEC next considered whether the disclosures in the fund prospectuses and SAIs satisfied defendants' Rule 10b-10 disclosure obligations. The SEC found that under the currently applicable standards, the disclosure[s] made here . . . suffice[] to meet Rule 10b-10's requirements. 11 Id. at 10. 29 Finally, the SEC turned to the Rule 10b-5 claims in these actions, noting that [t]he fact that [a] disclosure satisfies Rule 10b-10 does not necessarily mean that there has been no violation of Rule 10b-5. Id. at 28. The SEC, however, did not address whether its conclusion that defendants complied with Rule 10b-10 had any bearing on plaintiffs' Rule 10b-5 claims here. Id. Rather, the SEC merely stated with respect to the claims: In our view, the important issues are whether the omitted information is material and whether the omissions were made with scienter. Id. at 29. Regarding the materiality of the omissions, the SEC simply noted that the existence of the payments and some information about them was disclosed in the prospectuses, so the issue is whether the difference between the information that was disclosed and the greater information that plaintiffs claim should have been disclosed is material. Id. The SEC concluded by stating that because resolution of materiality and scienter issues turns upon the application of established legal principles to the specific factual allegations in the complaints, and because [t]he Commission does not ordinarily address these sorts of fact-bound issues in an amicus brief, the SEC would express no opinion regarding plaintiff's Rule 10b-5 claims, especially in light of the emphasis on Rule 10b-10 issues in the Court's request. Id. at 30.