Court backs brokerages in forcing employees to hold accounts in-house

Brokerage firms can force their employees to keep investment accounts in-house at the brokerage firm, the U.S. Court of Appeals for the Ninth Circuit ruled last week. Broker plaintiffs in four California class-action cases filed against Wells Fargo Advisors, Morgan Stanley and Bank of America Merrill Lynch alleged that the firms' policies of requiring them to keep accounts at their employers for regulatory purposes was a violation of California labor law. But the three-judge panel upheld earlier lower court decisions that found federal securities law preempted enforcement of California's “forced-patronage” statute, which prevents employers from forcing employees to buy anything of value from the company. The brokers had argued that because they could not open trading accounts at discounters, the firms were violating California law. “They're paying $300 for [a trade] versus $9.99” at a discounter, said Mark Thierman, of the Thierman Law Firm PC, who filed one of the cases. But the court rejected that argument, saying that under Securities and Exchange Commission and SRO rules, broker-dealers have flexibility in adopting whatever trading polices they think will best prevent insider trading and similar abuses. Mr. Thierman said the plaintiffs could appeal by requesting an en banc review by the entire Ninth Circuit, but such actions are rarely successful, he said. In statements, the three brokerage firms said they were pleased with the decision. “The obligation of employers to effectively supervise employee trading accounts serves a critical federal purpose,” said Morgan Stanley spokesman Jim Wiggins. “We appreciate the fact that three more federal judges have recognized the importance of our internal monitoring efforts to fulfill our regulatory mandate to prevent customer and market abuses,” said Wells Fargo Advisors spokesman Tony Matera. The appeals court also rejected a “back up” argument made by the plaintiffs, who said that if the firms offered free trading accounts to employees, they could avoid violating the California law. “Not so,” the appeals panel said. The California statute “forbids mandatory 'free' accounts just as it forbids paid ones.”