Douglas McDaniel v. Wells Fargo Investments, Llc

We must decide whether federal securities law preempts the enforcement of California’s forced-patronage statute against brokerage houses that forbid their employees from opening outside trading accounts.

I

A

Federal law requires brokerage firms to take measures reasonably designed to prevent their employees from misusing material, nonpublic information. To meet that obligation, defendants Wells Fargo Investments, Wells Fargo Bank, Wells Fargo Advisers (collectively “Wells Fargo”), Morgan Stanley Smith Barney (“Morgan Stanley”), and Merrill Lynch, Pierce, Fenner .& Smith (“Merrill Lynch”) have adopted policies generally forbidding their financial advisors from opening self-directed trading accounts outside the firm. At Morgan Stanley, for example, though employees “may maintain money market and open-end mutual fund accounts away from the Firm as long as the accounts do not provide the ability to purchase or sell individual securities and other financial instruments,” they “generally must maintain all Employee Securities Accounts at the Firm.” To detect illicit trades, Morgan Stanley monitors in-house account transactions “for a variety of factors such as frequency of…