This opinion disposes of two separate appeals, each of which requires us to determine whether the defendants-appellees (the “broker-dealer defendants” or “defendants”)
BACKGROUND
I. The Complaints
Plaintiffs-appellants (“plaintiffs”) in the two actions are former and current clients of the broker-dealer defendants who established accounts with one or more of the broker-dealer defendants for the purpose of investing in various securities. When a client’s account contains uninvested funds, the broker-dealer defendants invest the uncommitted balances in money market funds. In the brokerage industry, this practice is referred to as an “automatic sweep.” Three of the broker-dealer defendants-Quick & Reilly, Inc., Bear Stearns & Company, Inc., and the Pershing Division of Donaldson Lufkin & Jen-rette Securities-sweep balances into money markets funds managed by Alliance Capital: (1) the Alliance Money Reserves Fund (“AMR Fund”); (2) the Alliance Prime Portfolio Fund (“APP Fund”); and (3) the Alliance- Capital Reserves Fund (“ACR Fund”). The remaining broker-dealer defendant, National Financial Services Corporation, sweeps balances into the Fidelity Daily Money Market Fund (“FDMM Fund”), which is managed by Fidelity Management & Research Company.
The thrust of plaintiffs’ complaints is that defendants have committed securities fraud in violation of Rule 10b-5 by failing to disclose that they receive fees from the money market funds and their advisers. In support of their Rule 10b-5 claim, plaintiffs allege that the broker-dealer defendants intentionally failed to comply with
Plaintiffs allege that the broker-dealer defendants failed to make adequate disclosures concerning two types of payments: (1) fees paid from the money market fund assets; and (2) fees paid by the fund advisers from their own resources (collectively “the fees”).
The relevant AMR Fund prospectus, dated November 1,1995, states:
Under a Distribution Services Agreement .the Fund makes payments to the Adviser at a maximum annual rate of .25 of 1% of the Fund’s aggregate average daily net assets. For the fiscal year ended June 30,1995, the Fund paid the Adviser at an annual rate of .21 of 1% of the average daily value of the Fund’s net assets. Substantially all such monies (together unth significant amounts from the Adviser’s own resources) are paid ... to[ among others,] broker-dealers and other financial intermediaries for their distribution assistance ....
(Emphasis added). In addition, the AMR Fund prospectus incorporates by reference a November 1, 1995 SAI, which was publicly filed with the SEC and was available upon request from Alliance Capital (“AMR SAI”). The AMR SAI discloses the total dollar amount for the fiscal year ended June 30, 1995, that was “paid by the Adviser and the Fund ... to broker-dealers and other financial intermediaries for distribution assistance.” (Emphasis added).
The relevant ACR Fund Prospectus, dated September 30, 1994, is nearly identical to the AMR Fund prospectus, disclosing that the Fund pays its Adviser at a maximum annual rate of .25 of 1% of the Fund’s aggregate average daily net assets and that such payments (combined with “significant amounts” from the Adviser)
The relevant APP Fund prospectus, dated April 20,1995, states:
Under a Distribution Services Agreement ..., [the] Portfolio pays the Adviser at a maximum annual rate of .45 of 1% of the Portfolio’s aggregate average daily net assets. Substantially all such monies (together with significant amounts from the Adviser’s own resources) are paid ... to[, among others,] broker-dealers .and other financial intermediaries for their distribution assistance ....
(Emphasis added).
The relevant FDMM Fund prospectus,, dated June 30, 1994, does not materially differ from the other prospectuses. It provides:
The Distribution and Service Plans (the Plans) require [the Adviser] to make ... payments from its management fee, its past profits or any other source available. The maximum amount payable is currently at the annual rate of .38% of the average net assets.
The FDMM Fund prospectus further states that “Qualified Recipients [such as broker-dealers] currently are compensated ... at a maximum rate of up to .38% annually of the average net assets of the ... Market Portfolio [for] which they provide or have provided shareholder support or distribution services.”
II. The District Court’s Decisions
On August 11, 1997, the district court (Patterson, J.) issued separate, unpublished decisions dismissing both actions pursuant to Fed.R.Civ.P. 12(b)(6). See Press v. Quick & Reilly, Inc., No. 96 CIV. 4278,
Beginning with plaintiffs’ allegations that defendants did not comply with Rule 10b-10, the district court rejected the defendants’- argument that Rule 10b-10 did not apply to the fees at issue. The broker-dealer defendants specifically argued that Rule 10b-10 applied only to fees calculated on a transactional basis and not to fees, such as the ones here, that are calculated on the basis of aggregate net assets invested over time. The district court rejected that argument, concluding that “[t]he language of Rule 10b-10 ... does not specify that the remuneration received must be calculated on a transactional basis, or in any other fashion, but only that it be ‘in connection with the transaction.’ ” Strougo,
After finding that the fees at issue are subject to Rule 10b-10’s disclosure obligations, the district court concluded that the defendants failed to comply with Rule 10b-10. In so holding, the district court relied on a 1979 No-Action letter by the SEC staff which states that so long as a fund prospectus discloses “the precise amount” or “a formula that would enable the customer to calculate the precise
The district court then turned to the plaintiffs’ Rule 10b-5 claims and found that although the broker-dealer defendants had failed to comply with Rule 10b-10’s disclosure requirements, the complaints failed to state a fraud claim under Rule 10b-5. Specifically, the district court concluded that the prospectuses and SAIs provide “enough information ... to negate any inference of [defendants’] fraudulent intent with respect to the failure to disclose information regarding commissions or financial interests.” Press,
III. The SEC’s Amicus Brief
The Press and Strougo plaintiffs separately appealed from the judgments of the district court. Their appeals were jointly argued before this Court on May 10, 1999. On October 29, 1999, the Court sent a letter to the SEC requesting that it submit an amicus curiae brief expressing the Commission’s views “on the issues set forth in the [parties’] briefs,” specifically “the distribution and advisory fee disclosure requirements” under Rule 10b-10.
On February 14, 2000, the SEC submitted identical amicus briefs for each appeal. The SEC stated in its amicus brief that, as the SEC understood the Court’s request, the brief would respond to the following question:
Whether the [prospectus and SAI] disclosures that were made about [the fee] payments failed to comply with Rule 10b-10, which requires broker-dealers to disclose the amount of remuneration they receive from third parties in connection with customer transactions.
SEC Brief at 1.
The SEC began its analysis by reciting the purpose of Rule 10b-10’s disclosure requirements. The SEC stated: “In pertinent part, Rule 10b-10 requires a broker-dealer to disclose to its customers any remuneration it receives from third parties in connection with a customer transaction so that the customers are aware of the existence and extent of any conflict of interest that the broker-dealer has.” SEC Brief at 9.
The SEC then stated its agreement with the district court’s conclusion that Rule 10b-10 requires disclosure of fees calculated on the basis of a fund’s assets, i.e., the fees at issue here. The SEC focused on Rule 10b-10’s language requiring disclosure of third-party remuneration “in connection with the transaction” and conclud
Having found that Rule 10b-10 applies to the fees at issue here, the SEC noted that although the broker-dealer defendants made no direct disclosures about the fees, defendants could rely on the disclosures in the fund prospectuses and SAIs to satisfy their Rule 10b-10 obligations. See SEC Brief at 24; see also id. at 10 (“[A]s a general principled delivery of a prospectus containing sufficient disclosure can satisfy a broker-dealer’s obligations under Rule 10b-10.”). In support of this proposition, the SEC pointed out a footnote to the adopting release for Rule 10b-10, which states that, if information required by Rule 10b-10 is contained in a prospectus for the fund in which the customer’s money is invested, a broker-dealer is not required to repeat such information in the periodic confirmation statements it sends to the customer. See SEC Brief at 24 (citing Securities Confirmations, Exchange Act Release No. 13508, § 1977-1978 Transfer Binder
But in evaluating the adequacy of the disclosures in the fund prospectuses and SAIs, the SEC rejected the district court’s conclusion that those public filings fail to satisfy defendants’ Rule 10b-10 obligations. The SEC explained that the district court erred at the outset by relying on the SEC staffs 1979 No-Action Letter.
The SEC stated, moreover, that the “precise amount” requirement for disclosure of charges paid by the customer is not
The SEC next considered whether the disclosures in the fund prospectuses and SAIs satisfied defendants’ Rule 10b-10 disclosure obligations. The SEC found “that under the currently applicable standards, the disclosure[s] made here ... suf-fiee[ ] to meet Rule 10b-10’s requirements.”
Finally, the SEC turned to the Rule 10b-5 claims in these actions, noting that “[t]he fact that [a] disclosure satisfies Rule 10b-10 does not necessarily mean that there has been no violation of Rule 10b-5.” Id. at 28. The SEC, however, did not address whether its conclusion that defendants complied with Rule 10b-10 had any bearing on plaintiffs’ Rule 10b-5 claims here. Id. Rather, the SEC merely stated with respect to the claims: “In our view, the important issues are whether the omitted information is material and whether the omissions were made with scienter.” Id. at 29. Regarding the materiality of the omissions, the SEC simply noted that “the existence of the payments and some information about them was disclosed in the prospectuses, so the issue is whether the difference between the information that was disclosed and the greater information that plaintiffs claim should have been disclosed is material.” Id. The SEC concluded by stating that because resolution of materiality and scienter issues “turns upon the application of established legal principles to the specific factual allegations in the complaints,” and because “[t]he Commission does not ordinarily address these sorts of fact-bound issues in an amicus brief,” the SEC would express no opinion regarding plaintiffs Rule 10b-5 claims, especially “in light of the emphasis on Rule 10b-10 issues in the Court’s request.” Id. at 30.
DISCUSSION
In reviewing the district court’s decision to grant defendants’ motion to dismiss, we accept plaintiffs’ factual allegations as true. See Shields v. Citytrust Bancorp, Inc.,
I. Rule 10b-10 Disclosure
We need not labor long on plaintiffs’ contention that the broker-dealer defendants failed to make adequate disclosures about the fees under Rule 10b-10, because we find that we are bound by the SEC’s interpretation of its regulation, i.e., that the general disclosures made by the
First, we note that the SEC reasonably determined that Rule 10b-10 applies to the fees here, given the Rule’s “in connection with the transaction” language and the expansive interpretation such language receives in the securities context. Cf. United States v. Newman,
Finally, although we are skeptical that the disclosures in the prospectuses and SAIs, i.e., general statements that payments were made by the funds and their advisers to broker-dealers for their assistance, would actually alert an investor that his broker-dealer received such payments, we cannot say that the SEC’s determination that Rule 10b-10 may be satisfied by these types of disclosures is plainly erroneous. Where an investor knows his uncommitted balances are automatically swept by his broker-dealer into a specific money market fund and where the prospectus for that fund reveals that the fund and its adviser pay fees to broker-dealers for their assistance, we recognize that it might be reasonable to expect an investor to piece together such .information and conclude that his broker-dealer receives fees from that money market fund.
We therefore adopt the SEC’s determination that no Rule 10b-10 violation occurred in this case. We now proceed to address plaintiffs’ Rule 10b-5 claims in light of that determination.
II. Rule 10b-5 Securities Fraud
Section 10(b) of the Exchange Act prohibits any person involved in the “purchase or sale of any security” from employing “any manipulative or deceptive device or contrivance in contravention of such rules and regulations” as the SEC “may prescribe.” 15 U.S.C. § 78j(b). “SEC Rule 10b-5, promulgated under [Section] 10(b), makes it unlawful to make material misstatements or to omit material facts in connection with the purchase or sale of any security.” Grandon v. Merrill Lynch & Co.,
In order to plead scienter adequately, a plaintiff must “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u-4(b)(2) (1994 & Supp.2000). “The scienter needed in connection with securities fraud is intent to deceive, manipulate or defraud, or knowing misconduct.” Press v. Chemical Inv. Sens. Corp.,
The district court held that the assorted disclosures in the fund prospectuses and SAIs negated any possible inference that defendants intended to deceive their customers. See Press,
We need not grapple with this thorny issue further, however, because, as discussed infra, the information plaintiffs claim to have been omitted by defendants is not material as a matter of law. Plaintiffs’ securities fraud claims therefore fail for want of materiality.
B. Materiality
An omission of information is material “if there is ‘a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.’” Acito v. IMCERA Group, Inc.,
Here, plaintiffs contend that knowledge that their broker-dealers have a conflict of interest, i.e., that their broker-dealers are paid by the money market funds the broker-dealers selected for “automatic sweeps” of plaintiffs’ uncommitted account balances, is material. We agree. See Chasins v. Smith, Barney & Co.,
Our holding that defendants did not omit material information because defendants were in compliance with Rule 10b-10 is not entirely free of tension. As the SEC noted in its amicus brief, Rule 10b-5 materiality in this case ought to boil down to “whether the difference between the [Rule 10b-10] information that was disclosed and the greater information that plaintiffs claim should have been disclosed is material.” SEC Brief at 29. The “greater information” here-an explicit
Moreover, we are well aware that the Preliminary Note to Rule 10b-10 states that “[t]he requirements under this section that particular information be disclosed is not determinative of a broker-dealer’s obligation under the general antifraud provisions of [Rule 10b-5].” 17 C.F.R. § 240.10b-10 Preliminary Note. The release accompanying the enactment of the Preliminary Note further explains that the note is meant to clarify that Rule 10b-10 “is not intended as a safe harbor from disclosure obligations imposed by the general antifraud provisions of the federal securities laws.” . Confirmations of Transactions, Exchange Act Release No. 34962, (1994-1995 Transfer Binder
Despite these considerations favoring a finding of materiality here, we believe such a finding would supplant the SEC’s determination of what is material with our own. This conclusion rests on the crucial common ground between the purpose of Rule 10b-10 and the reason plaintiffs claim additional disclosure was necessary under Rule 10b-5 — disclosure of a broker-dealer’s conflict of interest created by the receipt of remuneration from third-parties.
By concluding that the disclosures in the fund prospectuses and SAIs were sufficient to satisfy defendant’s disclosure obligations under Rule 10b-10, see Brief at 11-12, the SEC must have determined, as a policy matter, that the broker-dealer defendants’ conflict of interest was sufficiently disclosed to plaintiffs. The SEC emphasized repeatedly that “the purpose of Rule 10b-10 ... is to give customers relevant information about conflicts of interest that third-party payments create on the part of the broker-dealers.” SEC Brief at 18-19; see also id. at 9 (“Rule 10b-10' requires a broker-dealer to disclose to its customers any remuneration it receives from third parties in connection with a customer transaction so that the customers are aware of the existence and extent of any conflict of interest that the broker-dealer has.”) (emphasis added); id. at 14-15 (“In the adopting release for Rule 10b-10, the Commission explained that disclosure of third-party remuneration is necessary because when a broker-dealer both acts as a customer’s agent and receives payments from others, the situation ‘presents a potential for abuse since there is a prima facie problem in representing fairly the rights of parties having conflicting interests.’ ” (quoting Exchange Release No. 13508, [1977-1978 Transfer Binder]
Thus, in concluding that defendants were in compliance with Rule 10b-10, the SEC necessarily concluded that the general disclosures in the prospectuses and SAIs achieve the purpose of Rule 10b-10, ie., adequate disclosure of the broker-dealer defendants’ conflict of interest. That purpose is exactly the purpose for which plaintiffs argue that “greater disclosure” under Rule 10b-5 is necessary. Therefore, because the SEC has decided precisely what type of disclosure is necessary to reveal a conflict of interest arising from third-party payments to broker-dealers in the context of Rule 10b-10, we will not undermine the SEC’s interpretation of its regulation by requiring even greater disclosure about that conflict of interest under the general antifraud provisions of Rule 10b-5.- Accordingly, we are compelled to conclude that additional disclo
For the foregoing reasons, we hold that defendants’ compliance with Rule 10b-10 renders the allegedly omitted information immaterial as a matter of law. Although we are not ourselves certain that the disclosure requirements under Rule 10b-10 fulfil its stated purpose, we defer to the SEC’s interpretation of its rule and leave it to the governmental entity best suited to sort out any inadequacies of the current disclosure regime.
CONCLUSION
Because we find that the information defendants allegedly omitted is not, as a matter of law, material under Rule 10b-5, plaintiffs’ securities fraud claims must fail. Accordingly, we affirm the district court’s judgment dismissing plaintiffs’ complaints.
Notes
. All of the defendants-appellees are broker-dealers except for U.S. Clearing Corp., which provides clearing services for securities transactions consummated by customers of broker-dealer defendant, Quick & Reilly, Inc., and Quick & Reilly Group, Inc., which allegedly "has the opportunity to and does control” U.S. Clearing Corp. and Quick & Reilly, Inc. because it owns all of the capital stock of those corporations. For ease of reference, we refer to U.S. Clearing Corp. and Quick & Reilly Group, Inc. at "broker-dealer defendants” or "defendants” as well.
. The Strougo plaintiffs also allege that uncommitted balances of an uncertified class of plaintiffs with Bear Stearns & Co. brokerage accounts are automatically swept into the Alliance Capital Management Institutional Reserves Fund ("ACMIR Fund”). They further allege that National Financial Services Corp. executes automatic sweeps of its clients accounts into the Fidelity Capital Reserve Fund ("FCR Fund”). The district court declined to address plaintiffs' claims concerning the AC-MIR Fund on the ground that the complaint "fails to attach or make allegations with respect to the [ACMIR Fund] prospectus and instead references the ACR [Fund] prospectus.” Strougo v. Bear Stearns & Co., No. 95 CIV. 6532(RPP),
. Rule 10b-10 provides, in relevant part:
(a) Disclosure Requirement. It shall be unlawful for any broker or dealer to effect for or with an account of a customer any transaction in, or to induce the purchase or sale by such customer of, any security ... unless such broker or dealer, at or before completion of such transaction, gives or sends to such customer written notification disclosing:
(D) The source and amount of any other remuneration received or to be received by the broker in connection with the transaction!.]
17 C.F.R. § 240.10b-10.
. These allegations also form the basis of the Press and Strougo plaintiffs' state law claims for fraud, breach of fiduciary duty, and unjust enrichment.
. A money market fund is a separate legal entity whose assets are managed by a fund adviser that is compensated pursuant to a contract between the adviser and the fund. Broker-dealers that sell funds to the public may be compensated by: (1) commissions or sales loads paid by the investor; (2) payments from the fund assets, as permitted under Investment Company Act Rule 12b — 1, 17 C.F.R. § 270.12b-l (1999); and (3) payments from the fund adviser’s own resources. Plaintiffs do not contend that the receipt of these payments is, of itself, improper. Rather, they maintain that the failure to disclose receipt of such payments violates the applicable disclosure requirements under Rules 10b-5 and 10b-10.
. In their complaints, the plaintiffs explicitly incorporate by reference the funds’ prospectuses.
. By dismissing the complaints in their entirety, the district court must have presumed that a violation of Rule 10b-10 does not, of itself, create a private cause of action. Whether a private cause of action may be brought for violations of Rule 10b-10 appears to be an open question, see Levitin v. PaineWebber, Inc.,
. The SEC also noted that its interpretation was "consistent with the traditional understanding that the phrase 'in connection with’ in the federal securities laws is [to be] broadly construed.” SEC Brief at 18 (stating that the phrase "must be construed ... flexibly to include deceptive practices touching the sale of securities”) (quoting United States v. Teicher,
. Footnote 41 to the adopting release provides, in relevant part:
Of course, in the case of offerings registered under the Securities Act of 1933, the final prospectus delivered to the customer should generally set forth the information required by the proviso with respect to source and amount of remuneration.... In such situations the information specific in the proviso need not be separately set forth on the confirmation.
Exchange Act Release No. 13508, [1977-1978 Transfer Binder]
.The SEC, however, did confirm that the 1979 No-Action Letter is still in effect. The SEC explained that, although the Commission staff stated in a March 16, 1994 letter from Brandon Becker to Paul Schott Stevens,
. Although the AMR Fund and ACR Fund made disclosures in their prospectuses and SAIs, the APP Fund and FDMM Fund only made such disclosures in their prospectuses. Because the disclosures in all the prospectuses and SAIs are substantially the same— stating generally that broker-dealers receive remuneration — we do not view the additional SAI disclosures for the AMR Fund and ACR Fund to make any difference in the determination that those funds adequately disclosed information under Rule 10b-10.
. We believe that this result is entirely consistent with the Preliminary Note to Rule 10b-10, because the disclosure requirements of Rule 10b-5 still apply to those categories of information not specifically covered by Rule 1 Ob — 10. We do not view the Preliminary Note as allowing Rule 10b-5 claims seeking additional disclosure with respect to information already contemplated by Rule 10b-10, because such an interpretation would render Rule 10b-10’s disclosure requirements meaningless. The few cases stating that RulelOb-10 compliance will not save a broker-dealer from a Rule 10b-5 claim also support our interpretation of the Preliminary Note. In Ettinger v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
. The SEC also appears to recognize our concern. In its amicus brief, the SEC notes that "a broker-dealer customer that has invested in a fund typically cannot tell from the prospectus whether his broker-dealer received any such payments, or the amount actually paid to broker-dealers rather than to other intermediaries or spent by the adviser itself." SEC Brief at 26 (emphasis in original). Despite its apparent recognition that current disclosure requirements of Rule 10b-10 might not serve their intended purpose, the SEC concludes in the subsequent sentence that "[njonetheless, the Commission believes that [plaintiffs'] disclosure of the information about [the fees] ... is sufficient to satisfy the requirements of Rule 10b-10.” SEC Brief at 26. Seemingly aware that Rule 10b-10 might not require adequate disclosure "as a matter of policy” in its existing state, the SEC volunteered that "[t]he Commission has directed [its] staff to make recommendations ... as to whether additional disclosure should be required or current disclosure further refined” under Rule 10b-10. SEC Brief at 24 & n. 9.