Friday, October 09, 2015

Appellate Panel Rejects Private Right of Action for Broker-Dealer Rule

By Amanda Maine, J.D.

A panel for the Sixth Circuit Court of Appeals affirmed a lower court ruling finding that there is no private right of action under the SEC’s customer protection rule, which regulates the custody and use of customer securities held by broker-dealers. Absent a remedy expressly provided by statute, the courts must presume that Congress did not want to permit the private enforcement of the statute, the panel explained (Harris v. TD Ameritrade, Inc., October 8, 2015, Sutton, J.).

Background. In 2005, Elsie, Muriel, and David Harris bought shares in Bancorp International Group. Their broker, TD Ameritrade, used Depository Trust & Clearing Corporation to hold the shares on the Harrises’ behalf. In 2011, the Harrises decided they wanted to hold some of the shares in another form where they would be registered in the Harrises’ name and allow them to possess a physical copy of a certificate of ownership. However, Depository Trust had imposed a lock on Bancorp International stock, which prohibited activity in the stock. The lock was imposed because someone had fraudulently created millions of invalid Bancorp International shares. Due to the lock, TD Ameritrade refused to convert the Harrises’ ownership as they desired. The Harrises sued TD Ameritrade, alleging violations of SEC Rule 15c3-3 and Nebraska law. The district court determined that there was no private right of action under either and dismissed the case. The Harrises appealed.

Decision affirmed. Exchange Act Rule 15c3-3, known as the customer protection rule, imposes several obligations on securities brokers and dealers, including an obligation that gives its customer an “absolute right…to receive…following demand made on the broker or dealer, the physical delivery of certificates for…[f]ully-paid securities to which he is entitled.” However, as the lower court pointed out and the appellate panel agreed, the Exchange Act does not expressly provide a private remedy for the enforcement of Rule 15c3-3. Without an express private right of action by statute, courts must assume that Congress did not intend for that provision to be enforced by private parties, the panel explained. The panel also refused to use equitable powers to imply a private right of action as requested by the Harrises, advising that to do so would exceed its authority.

Similarly, the court pointed out that the Nebraska Commercial Code provisions cited by the Harrises do not provide for private rights of action. The court again refused to imply a private right of action here, stating that the Nebraska legislature created private rights of action where it wanted to and that the court lacks the authority to create one.

Accordingly, the panel affirmed the judgment of the lower court.

The case is No. 15-5220.

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