Brokerage Firms Continue To Equivocate in Defining the Roles of Their Brokers
aced with several class action lawsuits nationwide by commission-based brokers who seek payment of overtime, some brokerage firms have adopted yet another definition of the roles and responsibilities of their brokers. Let's explore this ever-changing area.
In the beginning, there was Leib v. Merrill Lynch. Though written in 1978 by a federal district court judge sitting in the Eastern District of Michigan, and though contradicted by some court decisions rendered since then, brokerage firms continue to cite the case in securities arbitration proceedings to this day. Brokerage firms seize upon the court's language that, in a non-discretionary account, "all duties to the customer cease when the transaction is closed." Moreover, brokerage firms quote Leib's language that a broker "has no continuing duty to keep abreast of financial information which may affect his customer's portfolio or to inform his customer of developments which could influence his investments." In short, this view stands for the proposition that brokers are responsible only for executing trades properly, with no duty to offer advice or warnings about investments.
More recently, brokerage firms had to take a position with respect to how they would describe the services that their brokers (now called anything but "brokers" - such as "financial consultants" or "financial advisers") offered. The context was the Securities and Exchange Commission's (SEC) inquiry, and ultimate final approval of what had become known as the "Merrill Rule", whereby brokers are exempt from registering as investment advisers under the Investment Advisers Act of 1940, so long as their advice is "solely incidental" to their brokerage function (that is, their sales function).
Brokerage firms had a choice. They could have defined the roles of their brokers as being equivalent to the roles of investment advisers or financial planners (thus requiring registration as investment advisers). Or, they could choose to define the roles of their brokers in a limited manner, such that any investment advice would be "solely incidental" to the brokerage function.
Brokerage firms chose to take the latter position. For example, in its SEC filing, UBS (PaineWebber) took the position that while its financial reports for customers "contain some elements of investment advice", nonetheless, "the planning analysis and recommendations cover a variety of other topics that do not involve general or specific investment advice at all and for which investment adviser regulation is neither appropriate or required." Likewise, Citigroup Global Markets (Smith Barney) took the position that even its fee-based (not commission-based) AssetOne account "is a brokerage account and not an investment adviser account."
Since those declarations in 2004 and 2005, brokers have filed class action lawsuits alleging that their brokerage firms violated the Fair Labor Standards Act and state wage hour statutes in failing to pay them overtime. Many cases (including ones filed by the author's law firm) are pending. Some cases have settled. For example, Citigroup Global Markets and UBS agreed to settle nationally, paying $98 million and $89 million, respectively. Morgan Stanley and Merrill Lynch settled in California but in no other states, paying $42.5 million and $37 million, respectively.
However, one firm, A.G. Edwards, filed a motion for summary judgment. A.G. Edwards argued that commission-based brokers are not entitled to overtime. The federal district court in California denied the motion for summary judgment in its entirety.
As background, the Fair Labor Standards Act (FLSA) exempts certain employees from overtime pay requirements, so long as the employer proves that the employee meets both of two tests: the salary-basis test and the duties test. In its motion for summary judgment, A.G. Edwards argued that its brokers were paid a guaranteed salary, in effect, because the firm paid them a draw against future commissions. The court rejected that argument that the draw was the equivalent of a guaranteed salary, reasoning that, "Case law and the DOL [Department of Labor] letters cited by both parties, therefore, appear to support that deduction of Plaintiff's draw salary from a subsequent paycheck is an impermissible offset."
Turning to the duties test, A.G. Edwards attempted to convince the court that the primary duties of its brokers were "administrative", as distinguished from "sales", such that they fell within one of the duties exemptions to overtime pay requirements. A. G. Edwards claimed, among other things, that its brokers underwent extensive training on management of client portfolios, "only a small portion of which focused on prospecting." Of course, the argument that brokers had a duty to manage client portfolios flew in the face of Leib and was inconsistent with positions taken more recently that investment advice is "solely incidental" to the brokerage (sales) function. In any event, the court relied on testimony and documents suggesting that the primary duty of A.G. Edwards' brokers was to sell. Accordingly, the court found that there was a genuine issue of material fact "regarding whether Plaintiffs are engaged in work that results from the product that Defendant profits from, in this case sales of securities and other financial offerings, rather than in the administration of Defendant's business or that of its existing customers."
What are the roles and responsibilities of brokers? The answer (that brokerage firms provide) depends upon the circumstances. But one thing is clear: what brokerage firms for years have claimed about their brokers' limited duties to customers, now, in the context of broker class action lawsuits for overtime pay, may come back to haunt them.
_______________________________________________________________________
James J. Eccleston is a securities attorney, representing customers as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston, and can be reached at 312-621-4400.
|
Download Acrobat Reader
