Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Thursday, April 4, 2013

Second Circuit Interprets SEC Rule 10b-16 and Disclosure of Margin Policies

The Second Circuit recently reviewed a broker-dealer's disclosure obligations to its customers regarding margin maintenance requirements for margin accounts.  In WC Capital Management, LLC v. UBS Securities, LLC (Docket No. 11-122-cv, decided Apr. 1, 2013) (Download WCCapitalvWillowCreek), the court held that a broker satisfies its disclosure obligations under Rule 10b-16(a) to disclose "conditions under which additional collateral can be required" when it discloses its generally applicable margin policies regarding the circumstances that may lead it to reevaluate the adequacy of the collateral in a customer's account and also indicates that more specific information about its margin policies is available.  In particular, the broker does not have to disclose "the precise, complex formulas it uses to calculate its collateral requirements."  Finally, Rule 10b-16(b)-- which requires brokers to provide at least 30 days written notice in advance of "any changes in the terms and conditions under which credit charges will be made" -- does not require the broker to provide advance notice before changing its margin policies.  The court specifically did not address whether customers have a private right of action under Rule 10b-16.

The SEC filed an amicus brief in support of UBS's interpretation of Rule 10b-16.  It explained that the Rule is purely a disclosure rule that does not require broker-dealers to adopt particular margin policies; it only requires that firms that do adopt such policies provide "useful guidance" to investors.  More detailed information about margin policies may not, in fact, be useful to investors because brokerage firms may change their margin policies without notice.  Hence, investors are "better served by the disclosure of relevant factors with an explicit warning that the brokerage firms can impose different requirements at any time."

With respect to the Rule 10b-16(b) claim, the court relied on the Rule's plain meaning, as well as the SEC's long-held interpretation, that margin policies and credit charges are two separate concepts.

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