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September 17, 1997


Appeal from the Order Dated November 11, 1996, Docketed November 14, 1996, In the Court of Common Pleas of Philadelphia County, Civil No. 0069 November Term, 1995.

Before: Beck, Popovich and Montemuro,* JJ. Opinion BY Beck, J.

The opinion of the court was delivered by: Beck


Filed September 17, 1997

We decide, inter alia, whether a customer may maintain a state common law cause of action for breach of fiduciary duty and breach of contract against a securities broker arising out of inadequate disclosure of order flow payments or whether such action is preempted by the federal Securities Exchange Act, 15 U.S.C. § 78 et seq., and relevant regulations. We hold that under the facts of this case a customer may not maintain a state common law cause of action, and therefore affirm the trial court.

The customer, plaintiff-appellant Meyer W. Shulick, filed this action against defendant-appellee PaineWebber, Incorporated (hereinafter "PaineWebber"), alleging, inter alia, that appellee breached its fiduciary duty to appellant and other investors when it accepted "order flow payments" without permission from or adequate disclosure to them. *fn1 Appellee filed preliminary objections, arguing that the common law causes of action alleged by appellant were preempted by federal securities law. The trial Judge granted the preliminary objections, holding that appellant's lawsuit was indeed preempted, and dismissed the action. The court relied on cases from other jurisdictions that have addressed this issue, as our courts have not. We find the reasoning in these cases compelling, and therefore affirm.

In determining whether the trial court properly sustained preliminary objections we must consider the legal sufficiency of the complaint and, assuming the averments of the complaint to be true, whether the plaintiff made out a cognizable cause of action. Gordon v. Lancaster Osteopathic Hospital Assoc., 340 Pa. Super. 253, 489 A.2d 1364 (1985); D'Antona v. Hampton Grinding Wheel Co., 225 Pa. Super. 120, 310 A.2d 307 (1973).

The complaint in this case sets forth the following factual averments. PaineWebber is a national securities brokerage firm. It has executed numerous securities transactions on behalf of appellant Shulick for which it has received payments, credits or other forms of remuneration commonly referred to as "order flow payment." When a client authorizes a securities transaction, PaineWebber directs or routes the order to a particular exchange, wholesale dealer or market maker for execution. In an effort to attract the order, the exchanges, wholesale dealers or market makers give PaineWebber a payment, credit, compensation, rebate, remuneration, fee reduction, clearance, consideration or other orders or inducements having an economic value. This "order flow payment" provides broker-dealers with economic incentives to place orders with one particular exchange, dealer or market maker over another.

Appellant claims that these order flow payments were not adequately disclosed to him, that he did not consent to their retention by PaineWebber, and that PaineWebber breached its fiduciary duty to him and other investors by concealing the details of these order flow payment transactions. Appellant argues that, because of the influence of order flow payments on the broker's actions, the investors do not receive the "best execution" possible on their securities transactions. Appellant also asserts that PaineWebber breached its fiduciary duty and duty of loyalty to and its contract with its investors.

Appellant seeks an accounting of all monies received by appellee during the relevant transactions, payment of damages for the value of the order flow payments received, attorneys' fees and costs, and a return of all commissions earned by appellee during transactions that violated appellee's fiduciary duty and duty of loyalty to its investors.

Since 1977, federal securities regulations have required that a broker acting as an agent for a customer disclose on a "trade confirmation" slip sent to the customer after a trade:

the source and amount of any other remuneration received or to be received by him in connection with the transaction; provided, however, that . . . the written notification may state whether any other remuneration has been or will be received and that the source and amount of such other remuneration will be furnished upon written request of such customer.

17 C.F.R. § 240.10b-10 (a) (3) (iii). These disclosure requirements were proposed by the SEC as "'a uniform rule applicable to all who wish to effect transactions for or with investors.'" Guice v. Charles Schwab & Co., 89 N.Y.2d 31, 39, 674 N.E.2d 282, 651 N.Y.S.2d 352 (1996) (citing Securities Confirmations Proposed Rule, SEC Exchange Act Release No. 12806).

By 1995, the SEC had rejected efforts to eliminate the practice of order flow payments, *fn2 and instead revised Rule 10b-10 to require that "at or before completion of ...

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