Court Opinion

ID: 9734993
Source: CourtListenerOpinion
Date Created: 2023-08-26 17:55:41.822442+00
Date Added: 2024-06-11T18:26:53.346920
License: Public Domain

PRESIDING JUSTICE ZWICK, dissenting: The majority concludes that common law agency principles are implicitly preempted by the implementation by the Securities and Exchange Commission Rule 10b — 10. It reaches this conclusion by adopting the sweeping and erroneous premise that "the securities industry is a national market which must be regulated uniformly.” 285 Ill. App. 3d at 945. In my view, the majority has gotten it exactly backwards. The disclosure by an agent to his principle that he is earning additional remuneration or a "kickback” does nothing to interfere with uniform regulation of the securities industry. In passing the securities laws, Congress deliberately created a dual system of regulation in which both federal and state laws govern industry participants, so long as state regulation is not inconsistent with federal law. Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Ware, 414 U.S. 117, 137, 38 L. Ed. 2d 348, 365, 94 S. Ct. 383, 394-95 (1973). Section 28(a) of the Exchange Act could not be clearer: [t]he rights and remedies provided by this chapter shall be in addition to any and all other rights and remedies that may exist at law or inequity.” (Emphasis added.) 15 U.S.C. 78bb(a) (1994). To this end, Rule 10b — 10 was promulgated by the SEC in 1977 to set forth the minimum disclosure requirements, not displace those disclosures required by the common law. Rule 10b — 10 is entitled "Confirmation of Transactions” and sets forth various disclosures that a broker or dealer must make to customers in writing at or before the completion of certain transactions. In the release announcing the adoption of the rule, the SEC stated in pertinent part: "The rule does not attempt to set forth all possible categories of material information to be disclosed by broker-dealers in connection with a particular transaction in securities. Rule 10b — 10 only mandates the disclosure of information which can generally be expected to be material. Of course, in particular circumstances, additional information may be material and disclosure may be required.” Securities Exchange Act Release No. 13,508 (May 5, 1977). Thus, Rule 10b — 10 was never intended to serve as a "safe harbor.” Throughout the process of adopting, and then amending, Rule 10b — 10, the Securities and Exchange Commission has maintained the position that additional disclosure beyond the SEC rules may be required. See, e.g., Ettinger v. Merrill Lynch, Pierce, Fenner & Smith, 835 F.2d 1031, 1035 (3d Cir. 1987). Although the SEC ultimately adopted a safe harbor for brokers and dealers in Rule HAcl — 3 (17 C.F.R. § 240.11Acl — 3 (1996)), which provides a mechanism pursuant to which brokers and dealers can effectively disclose payment for order flow concerns to customers prior to the establishment of a agent/ principal relationship, it is important to keep in mind that this new rule was not in effect at the time the transactions now at issue took place. Rule HAcl — 3, therefore, is simply not relevant to the plaintiffs’ claims or to our preemption analysis. If the allegations of plaintiffs’ complaint are taken as true, as they must be at this stage of the proceedings, it is clear that the plaintiffs have alleged a valid cause of action. This case is indistinguishable from Janes v. First Federal Savings & Loan Ass’n, 57 Ill. 2d 398, 312 N.E.2d 605 (1974), in which a lender that obtained title insurance for its customers and then received rebates from the title company for sending it the business was held to have a fiduciary duty to pass the rebate money on to the customers. The supreme court noted that, "[u]nless otherwise agreed, an agent who makes a profit in connection with transactions conducted by him on behalf of the principal is under a duty to give such profit to the principal.” Janes, 57 Ill. 2d at 410, quoting Restatement (Second) of Agency § 388 (1958). There are any number of similar opinions, from Illinois as well as from other jurisdictions, stating this same long-standing and fundamental agency principle. The prior disclosures required by the common law for an agent to keep the type of "kickbacks” that order flow payments represent in no way represent an obstacle to the federal goal of establishing an efficient and equitable national market. If brokers and dealers wish to earn a profit in executing their clients’ orders in addition to their bargained-for commissions, all that the common law requires is for brokers and dealers to disclose this additional remuneration prior to entering into the agency relationship with their clients, as Rule HAcl — 3 now contemplates. In that they hold otherwise, the cases relied upon by the majority are wrongly decided. The Guice court reasoned that since the 1975 amendments to the Securities Exchange Act were designed, in part, to create a "uniform” national market, the SEC must have intended to promote a "uniform” rule for order flow payments when it promulgated Rule 10b — 10 in 1977. Yet my research indicates that payment for order flow is a fairly recent practice that grew up after the SEC’s promulgation of Rule 10b — 10 in 1977. Order flow payments appear to have first come to the attention of the news media and the National Association of Securities Dealers only in 1985. See Note, The Perils of Payment for Order Flow, 107 Harv. L. Rev. 1675, 1676 n.8 (1994); J. Sasseen, Dirty Little Secret, Forbes, June 17, 1985, at 203. It follows that payment for order flow by brokers could not have been contemplated or specifically regulated in 1977 by Rule 10b — 10 when the SEC promulgated the rule. It is not surprising, therefore, that the 1976 SEC release asking for public comment on then proposed Rule 10b — 10 does not mention payment for order flow. Instead, the release explains that the proposed rule is designed to deal with a quite different problem, namely, "with agency crosses in the over-the-counter market where the broker acts as agent for both the buyer and the seller.” (Emphasis added.) Securities Exchange Comm’n Proposed Rulemaking, Exchange Act Release No. 12,806 (September 16, 1976). Similarly, the 1977 SEC release that accompanied the final rule discusses how the rule would be applied when a brokerage firm represents the buyer and seller in the same transaction. Securities Exchange Act Release No. 13,508 (May 5, 1977). The Minnesota Supreme Court’s recent opinion in Dahl is no more compelling. The Dahl court concludes that, "For [defendant] Schwab to fully comply with these state agency law requirements, it would need to be able to ascertain the exact amounts of these profits in order to seek its clients’ consent, or to remit them to its customers if consent were withheld.” Dahl, 545 N.W.2d at 925. This conclusion is unsupported by agency law, logic or the record in our case. An agency is a consensual relationship. State Security Insurance Co. v. Frank B. Hall & Co., 258 Ill. App. 3d 588, 595, 630 N.E.2d 940 (1994). As such, the relationship can be modified by mutual agreement as the parties see fit. All the defendants need have done to comply with the common law was to have informed their clients that, as a condition of accepting client business, the defendants would insist on retaining any order flow payments received in connection with the execution of client orders. Defendants elected not to do so. If the defendants now believe they have an onerous obligation under the common law to refund order flow payments, I can only conclude that they have brought this obligation upon themselves by not fully informing their clients of the true nature of their remuneration. For the above reasons, I respectfully dissent.