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Friday, December 8, 2023 | Back issues
Courthouse News Service Courthouse News Service

Brokers Lose Fight to Trade Outside Own Firms

(CN) - Top brokerage firms should not face a challenge to their policies prohibiting financial advisers from opening outside trading accounts, the 9th Circuit ruled Tuesday.

Douglas McDaniel, Bryan Clark, Holly Hanson, John Rennell, Marcia Bloemendaal, David Notrica, Kristen Heilemann and Marcella Lees led the charge against the policies in separate class actions against Wells Fargo Investments, Morgan Stanley Smith Barney, Merrill Lynch, and Pierce, Fenner & Smith.

McDaniel and the others are all financial advisers and consultants who previously worked for the defendant brokerages in California. In claiming that the well-established rule against self-directed outside trading accounts violates a state-level law against "forced patronage," the workers argued that such a policy essentially requires employees to purchase financial products from their employer.

The brokerage firms meanwhile defended their bans as the simplest and most effective way to monitor their employees' trades and prevent insider trading.

In each case, federal judges dismissed the claims as pre-empted by a federal securities law that allows brokerage firms wide discretion in adopting internal policies designed to prevent insider trading and other crimes.

Consolidated for appeal, a three-judge panel of the 9th Circuit unanimously agreed on Tuesday.

"Amended to encourage brokerage houses to deter insider trading, the Securities Exchange Act requires the adoption and enforcement of not just any employee-trading policies but specifically those designed most reasonably in light of 'the nature of such broker's or dealer's business,'" Judge Diarmuid O'Scannlain wrote for the Pasadena-based panel. "Plainly, this language calls on securities firms to decide for themselves how best to monitor their employees' trading, suggesting that individually tailored policies serve as 'an important means for achieving' the Act's basic goal of reducing insider trading." (Emphasis in original.)

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