iCalifornia’s Statutory Prohibition on Forced Patronage
California Labor Code Section 450(a) forbids employers from coercing the patronage of their employees: It provides:
“No employer, or agent or officer thereof, or other person, may compel or coerce any employee, or applicant for employment, to patronize his or her employer, or any other person, in the purchase of any thing of value.”
Broker/Dealer Obligations Under the Exchange Act and SRO Rules
Section 15(g) of the Securities Exchange Act of 1934 requires a brokers and dealers to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of material, nonpublic information by them or persons associated with them. The NYSE and FINRA have in turn adopted rules requiring their members to supervise the activities of their associated principals. The NYSE also specifically forbids employees of its members from establishing any securities or commodities account without the prior written consent of their employers. In order to satisfy these requirements, many brokerage firms have adopted rules prohibiting their employees from maintaining accounts “away from the firm”.
Employee Challenge to Broker Rules
In 2010, employees at several brokerage firms filed class actions challenging these policies as constituting forced patronage under Section 450(a). The federal district courts in the Northern and Central Districts dismissed these actions on the basis that Section 450(a) conflicts with federal law. This week, the Ninth Circuit Court of Appeals upheld the district courts in McDaniel v. Wells Fargo Investments, LLC, 2013 U.S. App. LEXIS 7124 (9th Cir., April 9, 2013).
Ninth Circuit Holds SRO Rules Preempt State Law
The opinion by Judge Diarmuid F. O’Scannlain is particularly noteworthy because he states that Self-Regulatory Organization (SRO) rules are capable of preempting state law -
“Indeed, Congress has vested the Financial Industry Regulatory Authority (FINRA, formerly the National Association of Securities Dealers (NASD)) and the New York Stock Exchange (NYSE) with the power to promulgate rules that, once adopted by the SEC, have the force of law. 15 U.S.C. § 78(s)(b) [Section 19(b) of the Exchange Act].”
(footnote omitted). However, the phrase “force of law” is not found in Section 19(b).
The Non-Delegation Doctrine
More importantly, SROs are not government agencies. Under Article I, Section 1 of the U.S. Constitution, all legislative power is vested in the Congress. Because members of Congress are elected by the people, they are politically accountable. When Congress authorizes the SEC to adopt regulations, Congress is making a limited delegation of its legislative powers to the executive branch. The SEC Commissioners are less directly accountable to the people, but there is some indirect accountability because they are appointed, and subject to “for cause” removal, by an elected official (the President) and must be confirmed by the Senate. SROs, which may be for-profit businesses, don’t have even this minimal level of accountability to the people. Unfortunately, the Ninth Circuit didn’t address the non-delegation issue because the court found that the plaintiffs had waived the issue.
What Does this Mean for Dodd-Frank Claw Back SRO Rules?
The Ninth Circuit’s holding that SRO rules have the force of law is likely to arise again when the exchanges adopt compensation clawback policies as required by the Dodd-Frank Act. Those policies may run afoul of California Labor Code Section 221 which provides “It shall be unlawful for any employer to collect or receive from an employee any part of wages theretofore paid by said employer to said employee.”
NYT Covers Nuntii Latini
I was pleased to see this article in The New York Times about Latin language news broadcasts by the Finnish state radio station. Attentive readers of this Blog won’t find Latin news broadcasts to be ”news” as they were mentioned in this August 2011 post.
