If there is no valid pre-dispute arbitration agreement,391 customers may bringactions against broker-dealers in court in connection with disclosure, customer communications (including advertisements), or suitability violations under Exchange ActSection 10(b) and Rule 10b-5
Private right of action
Courts have consistently recognized an implied private right of action under these provisions.392 Customers also may bring actions againstbroker-dealers for claims arising under state law, including those arising from breaches offiduciary duties under state law.393 See NASD By-Laws, Art. VI, Sec. 3(b); NASD By-Laws, Art. V., Sec. 4(b); NASD Notice toMembers 04-57, “NASD Extends Jurisdiction to Suspend Formerly Associated Persons Who Failto Pay Arbitration Awards” (Aug. 2004). See FINRA IM-12000. See FINRA Manual, Code of Mediation Procedure, Rule 14000 et seq. See FINRA Dispute Resolution Statistics, available at:http://www.finra.org/ArbitrationMediation/AboutFINRADR/Statistics/index.htm. See Exchange Act Section 6(b)(5) (with respect to exchange rules); Exchange Act Section15A(b)(6) (with respect to securities association rules).
Most investors who have brokerage accounts have signed a pre-dispute arbitration agreement
Most investors who have brokerage accounts have signed a pre-dispute arbitration agreement as acondition to opening the account. See supra note 378 and accompanying text. See, e.g., Ernst, supra note 186; Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 730, 744(1975); Superintendent of Ins. of N.Y. v. Bankers Life & Casualty Co., 404 U.S. 6, 13, n. 9(1971).
Liability for manipulation of securities
Exchange Act Sections 9(e), 16(b), and 18 provide express civil liability for manipulation of securities registered on exchanges, short-term insider trading and false filings. The Private Securities Litigation Reform Act of 1995 (“PSLRA”), which wasenacted to address perceived abuses in the securities litigation process, among otherthings, has imposed enhanced pleading requirements for fraud actions under the securitieslaws.
SRO rules give rise to private rights of action
Courts are divided over whether SRO rules give rise to private rights of action incourt.395 A violation of an SRO rule may, however, be relevant in a dispute indetermining whether a broker-dealer acted reasonably and in accord with the prevailing standards of the industry,396 or whether the broker has committed fraud.397 In addition,the violation of an SRO rule may be used as evidence of liability in an action claimingunder negligence or breach of fiduciary duty.
Contract rescission rights
Customers also may have contract rescission rights in certain circumstances.Exchange Act Section 29(b) provides, in pertinent part, that every contract made inviolation of the Exchange Act or of any rule or regulation adopted under the ExchangeAct (with certain exceptions) shall be void The Securities Act of 1933 (“Securities Act”) also provides a venue for civilliability and rescission rights. For example, pursuant to Securities Act Section 12(a)(1)any person that “[o]ffers or sells a security in violation of Section 5 (i.e., offers or sellsunregistered securities without an available exemption) is liable to his or her purchaserfor rescission or damages (subject to the loss causation provisions found in Section12(b)). Similarly, Securities Act Section 12(a)(2) generally provides that any person whooffers or sells a security, by “means of a prospectus or oral communication” that includesa material misstatement or omission, is liable to the purchaser for rescission or damages(subject
State and Other Regulation of Investment Advisers and Broker-Dealers
In addition to the federal securities laws and SRO rules, state and other regulationmay also apply to the provision of investment advice and recommendations about securitiesto retail customers.
State Registration and Regulation of Investment Advisers
Advisers Act Section 203A prohibits investment adviserswith less than $25 million of assets under management from registering under theAdvisers Act. The Dodd-Frank Act raised this to $100 million as of July 21, 2011. The sections relating to state regulation provide a general overview of investment adviser andbroker-dealer regulation, as applicable, in the 50 U.S. states and the District of Columbia (each a“state”). It generally does not cover the laws and regulations of Guam, Puerto Rico, or the U.S.Virgin Islands. See Section II.A.1, supra. States may also require investment advisers to make notice filings of documents filed with theCommission, and to pay filing, registration, and licensing fees. See NSMIA Section 307(a). State examinations are discussed in Appendix A, infra. States may not require an investment adviser to r
States exempt an investment adviser from registration
states exempt an investment adviser from registration if the adviser did not have a place ofbusiness in the state during the last twelve months and does not have more than five clients thatare resident in that state, as required by Advisers Act Section 222(d). Most states also exempt aninvestment adviser from registering if its only clients are financial institutions, such as investmentcompanies as defined in the Investment Company Act, other investment advisers, broker-dealers,banks, trust companies, savings and loan associations, insurance companies, employee benefitplans with assets of not less than $1 million, and government agencies or instrumentalities, andother institutional investors that the state may define by rule or order. See, e.g., Alabama (Ala.Code, Art. 1 §8-6-3), Alaska (Alaska Stat. §45.55.030 (c)), California (Cal. Corp. Code§25202(b));
Some states may require an investment adviser or its supervisory or controlindividual (if the investment adviser is a firm) to pass an exam, which may be waived ifthe investment adviser holds a certain designation or has passed the exam within twoyears of its investment adviser registration application.410 Some states also have adoptedrules specifically prohibiting investment advisers from engaging in certain conduct, suchas recommending securities without a reasonable basis to believe that therecommendation is suitable for the client, excessive trading, borrowing money orsecurities from a client, or lending money to a client (subject to certain exceptions, suchas when the client is a broker-dealer or a financial institution engaged in the business ofloaning funds)
Regulation of Investment Adviser Representatives
States generally impose registration, licensing, or qualification requirements oninvestment adviser representatives who have a place of business in the state, regardless ofwhether the investment adviser is registered with the Commission or with the states. funds or securities). See, e.g., Maryland (MD. Corps. & Ass’ns Code Ann. §11-409(A)(2) andMd. Regs. Code tit. 02, §5.14); Massachusetts (Mass. Regs. Code. Tit. 950 §12.205(5)(a)(2);Nebraska (Nev. Rev. Stat. §8-1103(4)(b)(v); Neb. Admin. R. & Regs.7-008.01A and 7-008.01B).But see states where the statutes permit the state administrator to set a net capital requirement, butthere are no current requirements, e.g. Maine (Me. Rev. Stat. Ann. tit. 32 § 10310(2)); Michigan(Mich. Comp. Laws §451.602(f)) and Minnesota (Minn. Stat. §80A.05(4)). See NASAA Model Rule USA 2002 411(b)-1, Financial Reporting Requirements for InvestmentAdvisers
Investment Advisers overview of State Regulation Intended to Protect Clients
The states regulate the activities of investment advisers in a number of ways.First, as previously discussed, under Advisers Act Section 203A, most small advisers areprohibited from registering with the Commission and are registered and regulated by stateregulators.400 Second, states may impose registration, licensing or qualificationrequirements on “investment adviser representatives” who have a place of businesswithin the state.401 States also retain authority over Commission-registered investmentadvisers under state investment adviser statutes to investigate and bring enforcementmactions with respect to fraud or deceit against an investment adviser and an investmentadviser’s associated persons, which is discussed in more detail below. Finally, asdescribed further below, the states are responsible for examining state-registeredinvestment advisers and their investment adviser representatives. Act Rule 203A-3 defines an “investment adviser representative” of an investment adviseras a