The Role and Regulation of Clearing Brokers-Revisited
The Business Lawyer, 2020
46 Pages Posted: 9 Sep 2020
Date Written: July 29, 2020
This article focuses on the liability of clearing brokers to introduced customers for the misconduct of their introducing firms. To delineate this liability, the article describes the distinct and separate responsibilities and functions of clearing and introducing firms in relation to transactions in introduced accounts. The article examines the key events that led Congress, in 1975, to mandate the U.S. Securities and Exchange Commission (“SEC”) to facilitate the establishment of a new and robust clearance and settlement system in the wake of the collapse of the prior, largely manual, system during the Paper Crunch crisis of the late 1960s and early 1970s as well as the resulting regulatory framework facilitated by the SEC between 1975 and 1982 that governs clearing brokers to this day. The article discusses the specific SEC and securities industry rules that form the core of this regulatory framework, which has guided the prevailing case-law on the liability of clearing brokers. The article also examines the more recent theories of clearing broker liability under the Bankruptcy Code and under state blue sky laws — theories that diverge from and conflict with prevailing case-law. The article briefly discusses why claimants in arbitration seem to have a higher success rate against clearing brokers than plaintiffs do in court with respect to the same or similar claims. The article concludes with the observation that conflicting standards of conduct and liability in the area of clearing broker regulation and case-law are fundamentally undesirable and that such conflicts should be mitigated or eliminated in deference to the federal regulatory framework established between 1975 and 1982 and refined and strengthened to date.
Keywords: clearing broker liability
JEL Classification: K22, K23
Suggested Citation: Suggested Citation