In a case of first impression in the Second Circuit, the securities industry urged the Second Circuit Court of Appeals to find that there is no implied private right of action under Rule 10b-16, which generally regulates the margin credit agreement between a broker and its customer. In an amicus brief, SIFMA said that implying a private right of action under Rule 10b-16 would run counter to clear congressional indications that the regulation of margin credit and margin credit disclosure involves important economic concerns and occupies a special regulatory status that is uniquely for federal administration and enforcement. Rule 10b-16 imposes on brokers and dealers the obligation to establish procedures for providing credit information at the time a margin account is opened and periodically thereafter. Rule 10b-16 also creates a duty to provide customers with notice and information when changes are made in the original credit terms. Importantly, noted SIFMA, the Rule does not state that a failure to establish adequate procedures, or to provide change notices, constitutes a manipulative or deceptive device or contrivance under the statute. Were a private enforcement right to be implied in the Rule, that right necessarily would consist of an action premised upon a broker-dealer's failure to develop the procedures the rule prescribes. In SIFMA's view, this plainly exceeds the scope of Section 10(b), the text of which does not even arguably address a broker-dealer's obligation to adopt procedures, much less suggest that a failure to do so constitutes a manipulative or deceptive device or contrivance for which a civil litigant may recover. The district court did not address the Rule 10b-16 private right of action question expressly, conceded SIFMA, ruling instead that appellants could not state a claim for a violation of the Rule because the initial margin credit disclosure statement that was provided to them complied with the notice and disclosure obligations set forth in the Rule. While SIFMA believes that the record amply supports the district court's decision, the brief notes that the appeals court may affirm on any grounds supported in the record, even if it is not one on which the district court relied. SIFMA submitted that affirmance would also be proper on the independent ground that Rule 10b-16 does not provide a private right of action. Congress has consistently afforded margin credit regulations special status, said amicus,and reserved the power to set, administer and enforce those regulations to the federal agencies uniquely positioned to understand them and the systemic risks they are designed to guard against. The implication of a private right of action under Rule 10b-16 would upset that regulatory balance without advancing the cause of full disclosure. Further, by arming aggrieved margin customers with the ability to shift their market losses through the threat or instigation of private lawsuits against their margin lenders broker-dealers may find it necessary to protect themselves by increasing the costs of margin lending or decreasing the extension of margin credit. Congress and the federal agencies have been careful to regulate margin lending without impairing the capital raising function that margin credit promotes. Private litigants should not be permitted to undermine that goal under a tortured interpretation of Section 10(b) and Rule 10b-16, contended SIFMA. Finally, SIFMA noted that Rule 10b-16 exceeds the scope of Section 10(b) for the additional reason that a violation of the Rule does not satisfy the "in connection with the purchase or sale of any security" element of a claim under Section 10(b). Rule 10b-16 fundamentally concerns the margin credit agreement between a broker-creditor and its customer-debtor. Non disclosure of information identified in the Rule is a non-disclosure of terms and conditions of the loan arrangement, reasoned SIFMA, not information relating to the value or price of the securities purchased with loan proceeds.
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