New Ruling Establishes a "Bright Line" For Broker-Dealers' Duty To Register With The SEC, Says Attorney

NEWARK, N.J., Sept. 11, 2012 /PRNewswire/ -- Stockbrokers who believe they're exempt from registering with the Securities and Exchange because they limit their activity to "proprietary trading," should re-examine their activities in light of a recent legal ruling, warned William A. Despo, a Newark-based shareholder at national law firm LeClairRyan and a member of its Financial Services Regulation and Securities Litigation Practice Area Team.

On September 5, SEC Chief Administrative Law Judge Brenda P. Murray issued an Order granting a motion by the SEC for Partial Summary Judgment against OX Trading, LLC—a Chicago-based securities dealer affiliated with online brokerage firm optionsXpress. "The firm took the position that it did not have to register with the SEC because of the so-called 'trader exception;' that it bought and sold securities for its own account," explained Despo, who is not involved with the case or with any of the principals. "But Judge Murray said the exception did not apply because OX Trading's regular business was trading securities to improve prices for optionsXpress, in addition to making profits for itself."

The allegations did not involve fraud or harm to customers, but focused on whether a business entity was required to register with the SEC, he added, noting that the ruling is significant.

"This decision helps to clarify when a company oversteps the boundaries of so-called 'proprietary trading,' when it may not have to register with the SEC, and when it crosses over into activity that can affect the market, in which case it needs to be registered," said Despo, who focuses his practice on securities and commodities law matters. "To paraphrase the judge, 'If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck."'

The ruling stemmed from charges that the SEC filed against OX Trading in April, alleging that the firm violated the registration provisions of the securities laws when it continued trading operations at least from October 17, 2009 to November 16, 2010, although it had ceased being a CBOE member on March 2, 2009, and deregistered as a broker-dealer with the Commission on October 17, 2009.  The firm, however, did re-register as a dealer with the SEC on November 16, 2010, and the CBOE approved OX Trading's application to be a proprietary trading permit holder organization on November 9, 2010.

"In court papers, OX Trading said it never purchased or sold contracts directly from or to an optionsXpress customer, and further claimed that neither OX Trading nor optionsXpress advertised to customers or publicized the securities OX Trading was willing to price improve," Despo said. "But the SEC's Division of Enforcement argued that most proprietary trading firms make investment decisions after orders are placed in the market. OX Trading, however, interacted with optionsXpress customer order flow before orders were sent to the market. Finally, OX Trading's profits came from its ability to trade on optionsXpress customer order flow, so it was irrelevant whether it held itself out separately to customers, according to the SEC."

This "bright line" ruling reinforces the need of firms to speak with their counsel about whether or not they need to be registered with the SEC and other regulators, Despo advised.

"Judge Murray's ruling illustrates the complex issues that can affect a matter like this," he noted. "By conferring with your counsel on a timely basis, you may to be able to avoid time-consuming litigation at a later date."

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SOURCE LeClairRyan