When Deference Becomes Abdication: Immunizing Widespread Broker-Dealer Practices From Judicial Review Through the Possibility of SEC Oversight

95 Pages Posted: 6 Jun 2019

Date Written: Fall 2003

Abstract

This Article uses three groups of recent securities law cases to examine the respective roles of the Securities and Exchange Commission (SEC) and the courts, both federal and state, in determining whether a fraud involving a broker-dealer and its customers has occurred. In these recent cases, the courts at both the federal and the state level have evinced a great hesitancy in adjudicating alleged violations by broker-dealers of fiduciary or fiduciary-type obligations owed to their customers. The sweep cases and the national best bid and offer (NBBO) case have all involved class actions alleging that broker-dealers have committed securities fraud under section 10(b) of the Securities Exchange Act of 1934 (1934 Act) and Rule 10b-5 promulgated thereunder by the SEC, as well as under applicable state law. The payment for order flow cases have involved, in contrast, allegations of fraud primarily under state law. In all three groups of cases, the alleged fraud has been carried out by means of allegedly non-disclosed wide­spread industry practices, which either involved broker-dealers receiving payments that allegedly were not disclosed properly to their customers (the sweep and payment for order flow cases) or payments allegedly in violation of their duty of best execution (the NBBO case). All three groups of cases also involved practices that the SEC has spent considerable time and resources studying. All of these practices were in areas subject to SEC regulation, even if the regulation did not address the particular challenged practices. The SEC regulatory regime, thus, arguably took into account these practices.

This Article argues that deference to the SEC is inappropriate when neither the doctrines of primary jurisdiction or preemption apply. Determinations of whether a misrepresentation or omission has been made, the materiality of the misrepresentation and all the other elements of a section 10(b) action are all areas in which the courts have great expertise. In fact, the fraud that section 10(b) reaches is based on state common law fraud. To allow industry-wide practices to escape judicial scrutiny because the SEC has the authority-which it has not exercised-to regulate these practices is, in many cases, to deprive customers-who were arguably harmed by these practices-of any effective review of the practices to determine if harm was, in fact, inflicted.

Suggested Citation

Facciolo, Francis, When Deference Becomes Abdication: Immunizing Widespread Broker-Dealer Practices From Judicial Review Through the Possibility of SEC Oversight (Fall 2003). Mississippi Law Journal, Vol. 73, 2003, St. John's Legal Studies Research Paper No. 19-0017, Available at SSRN: https://ssrn.com/abstract=3400298

Francis Facciolo (Contact Author)

St. John's University School of Law ( email )

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