Two men share securities regulation news

Breaking news and expert analysis on legal and compliance issues

[Back To Home][Back To Archives]

From Securities Regulation Daily, April 2, 2013

UBS Met Exchange Act Margin Disclosure Duties

By Mark S. Nelson, J.D.

The U.S. Court of Appeals for the Second Circuit has held that a broker-dealer did not violate Exchange Act Section 10(b) and Rule 10b-16 when it disclosed general in-house margin policies to customers but not more detailed information about how margin is calculated. The broker-dealer also was not required to notify its customers before changing its in-house margin rules. But the court did not decide if Rule 10b-16 allows private suits (WC Capital Management, LLC v. UBS Securities, LLC, April 1, 2013, Lohier, Jr., R.).

Background. WC Capital Management, LLC (WCCM) is the general partner and manager of Willow Creek Capital Partners, L.P. (WCCP) and Willow Creek Short Biased 30/130 Fund, L.P. (WCSB), both long-short funds that invest in companies that have less than $1 billion in market capitalization.

UBS Securities, LLC became WCCM’s prime broker in 2007. The UBS-WCCM client account agreement provided that UBS would hold WCCM securities and cash and make margin loans to WCCM. UBS could demand additional collateral at any time. UBS also issued a separate document that said UBS in-house margin policies are stricter than the minimum requirements imposed by the Federal Reserve Board and FINRA. The UBS document also said that UBS can raise house margin maintenance levels without telling WCCM in advance.

The WCCM-UBS relationship was cordial until WCCM’s funds’ performance slipped in 2008. After WCCM met a $6.5 million margin call, UBS sent WCCM a new margin level disclosure document that detailed increased margin requirements. WCCM then had to meet a second $13 million margin call in February 2009. As before, UBS followed up by sending WCCM a margin levels document that raised WCCM’s needed collateral.

WCCM brought suit contesting the adequacy of UBS’s margin disclosures. WCCM said it had lost $25 million due to UBS’s margin demands, of which it did not get advance notice. WCCM ultimately took its prime brokerage business elsewhere. The district court held for UBS, and the Second Circuit affirmed.

Scope of disclosure. The Second Circuit found that Rule 10b-16(a) requires disclosure of general factors which may lead to increased margin, but not detailed information about how in-house margin requirements are calculated. The court noted that the rule furthers the antifraud goals of Exchange Act Section 10(b) and implements Congress’ recommendation in the Truth in Lending Act that the SEC adopt similar rules for broker-dealers. The court also noted that the SEC’s adopting release said that Rule 10b-16 is a disclosure rule only.

Moreover, the court credited the SEC’s views, reiterated in its amicus brief, that because broker-dealers’ internal margin rules change frequently, they need only disclose general information that states the factors considered in fixing internal margin requirements. The SEC said that broker-dealers could inadvertently lead customers to rely on old margin rules if they were required to provide frequent, detailed disclosures. According to the SEC, the best practice under Rule 10b-16(a) is to disclose the factors that affect margin determinations and issue a warning that margin requirements can change at any time.

Here, UBS described the factors that impact calculation of margin in its initial disclosure to WCCM. The court said these factors were sufficient to let WCCM know of the future circumstances in which UBS may demand additional margin. The court also distinguished the D.C. Circuit’s Liang v. Dean Witter & Co decision, in which that court held that a broker-dealer’s margin disclosure was inadequate, because in that case the broker-dealer never disclosed its "actual" margin policy, whereas here UBS made all required disclosures.

Lastly, although holding against WCCM, the court found that WCCM had Article III standing to sue UBS because WCCM had alleged that it sustained an injury of $25 million that flowed from UBS’s alleged failure to disclose its margin policies. UBS had challenged WCCM’s right to challenge its margin policies in court.

Margin and credit. The Second Circuit, agreeing with the SEC’s amicus brief, said that Rule 10b-16(b) requires 30 days’ prior notice of credit terms but not of revised margin policies. The court said that advance notice of margin polices is not required because these policies are not "credit charges." The court also noted that the SEC has twice reiterated this position when it initially approved a NASD rule and again when it reapproved the equivalent FINRA rule.

Private suits. The SEC, in reply to the Second Circuit’s request for its views, had urged the court to find that Exchange Act Rule 10b-16 allows private suits. Similarly, UBS had asked the court to affirm the district court’s dismissal of WCCM’s suit on the ground that no Rule 10b-16 private right of action exists. Because the district court did not address the issue, the Second Circuit avoided the question by finding that the lower court correctly ruled that WCCM failed to state a claim.

The Second Circuit, however, noted the Rule 10b-16 private suit question is open to debate within the circuit. But the court also observed that no courts have ruled on this question since the Supreme Court further limited private suits under Exchange Act Section 10(b) in its 2008 Stoneridge opinion.

The case is No. 11-122-cv.

Attorneys: Anthony Joseph Harwood (Anthony J. Harwood) and George Donaldson (Law Offices of George Donaldson) for WC Capital Management, LLC, Willow Creek Capital Partners, L.P. and Willow Creek Short Biased 30/130 Fund, L.P. William Michael Regan, (Katten Muchin Rosenman, LLP) for UBS Securities, LLC and UBS AG.

Companies: UBS Securities, LLC; UBS AG; WC Capital Management, LLC; Willow Creek Capital Partners, L.P.; Willow Creek Short Biased 30/130 Fund, L.P.

ConnecticutNews NewYorkNews VermontNews BrokerDealers FraudManipulation

Securities Regulation Daily

Introducing Wolters Kluwer Securities Regulation Daily — a daily reporting service created by attorneys, for attorneys — providing same-day coverage of breaking news, court decisions, legislation, and regulatory activity.


A complete daily report of the news that affects your world

  • View full summaries of federal and state court decisions.
  • Access full text of legislative and regulatory developments.
  • Customize your daily email by topic and/or jurisdiction.
  • Search archives for stories of interest.

Not just news — the right news

  • Get expert analysis written by subject matter specialists—created by attorneys for attorneys.
  • Track law firms and organizations in the headlines with our new “Who’s in the News” feature.
  • Promote your firm with our new reprint policy.

24/7 access for a 24/7 world

  • Forward information with special copyright permissions, encouraging collaboration between counsel and colleagues.
  • Save time with mobile apps for your BlackBerry, iPhone, iPad, Android, or Kindle.
  • Access all links from any mobile device without being prompted for user name and password.