Stock Brokers Cannot Open Up Outside Trading Accounts

By Vance Knapp

In McDaniel v. Wells Fargo Investments, et al., No. 11-17017, (9th Cir. April 9, 2013), the Ninth Circuit Court of Appeals affirmed the dismissal of four separate class actions pending against several Financial Industry Regulatory Authority (FINRA) member securities firms. The cases raised the question of whether stock brokers are entitled to open their own outside trading accounts. The stock brokers claimed that since the firms’ trading policies only allowed them to open self-directed trading accounts in house, the brokers are forced to “patronize his or her employer. . .in the purchase of [a] thing of value” and thus amounted to forced patronage, which is prohibited by Section 450(a) of the California Labor Code. The brokerage firms argued that Section 450(a) was preempted by federal securities law, which allows securities firms to adopt regulations that they believe are best suited to prevent insider trading and similar abuses of federal law. The Ninth Circuit held that a fundamental purpose of the Securities Exchange Act is to allow securities firms to “decide for themselves how to best monitor their employees’ insider trading,” and that the district courts correctly determined that the U.S. Securities Exchange Act, and the FINRA members’ self-regulatory organization’s rules, preempted the enforcement of California’s forced-patronage act (§450(a)) of the California Labor Code.

The moral of the story, securities firms can set their own rules to prevent insider trading by their brokers.

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