Press v. Quick & Reilly, Inc.

United States Court of Appeals for the Second Circuit · 2000 · Corporations

218 F.3d 121 (2000)

Updated August 22, 2026

CorporationsSecurities fraudBroker-dealer disclosureRule 10b-5Rule 10b-10Section 10(b)materialityscienter

Facts

Broker-dealer defendants automatically swept customers' uninvested cash balances into specified money market funds. Plaintiffs alleged defendants chose poorly performing funds because the funds and their advisers paid defendants fees from fund assets and from advisers' own resources, and that defendants failed to disclose those payments directly to customers. The relevant fund prospectuses, and for some funds the SAIs, publicly disclosed in general terms that funds and advisers paid broker-dealers and other financial intermediaries for distribution assistance or shareholder support services. Plaintiffs claimed the nondisclosure of defendants' receipt of those fees violated Rules 10b-10 and 10b-5 because it concealed a conflict of interest.

Issue

Whether broker-dealer defendants violated Rule 10b-10 by failing to make more specific disclosures of fees they received from money market funds and fund advisers in connection with automatic sweep transactions, and whether the alleged omission of more explicit conflict-of-interest disclosure was material under Rule 10b-5. More specifically, the court had to decide what deference to give the SEC's view that the prospectus and SAI disclosures were sufficient under Rule 10b-10.

Rule

A court is bound by the SEC's interpretation of its own regulation unless that interpretation is plainly erroneous or inconsistent with the regulation. Under Rule 10b-10, third-party remuneration received by a broker-dealer in connection with customer transactions may be adequately disclosed through general disclosures in fund prospectuses and SAIs indicating that funds and advisers pay broker-dealers and other intermediaries for distribution assistance. Where the SEC has determined that such disclosures sufficiently reveal the broker-dealer conflict of interest that Rule 10b-10 is designed to address, the absence of more explicit disclosure of that same conflict is not material as a matter of law under Rule 10b-5.

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North Harbor Securities in Boston automatically places customers' idle cash into a registered cash-management fund. In an amicus brief filed in a private action, the SEC states that Rule 10b-10 permits a broker-dealer to satisfy its third-party remuneration disclosure duty through the fund's prospectus, which says the fund and adviser pay broker-dealers and other intermediaries for distribution assistance; the interpretation is textually plausible and not inconsistent with the rule.

How should a court treat the SEC's interpretation?

Explanation. The governing rule is that a court is bound by the SEC's interpretation of its own regulation, even when expressed in an amicus brief, unless the interpretation is plainly erroneous or inconsistent with the regulation. Under that standard, a reasonable SEC interpretation of Rule 10b-10 controls.