# Opposition Brief — Hendrickson v. American Skandia Life Assurance Corp. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386003_1528%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Opposition Brief - **Published:** January 1, 2005 - **Citation:** 543 U.S. 1146 ## Text L Supreme Court of the United States a lie - NASD Conduct Rule 2310 states: (a) In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs. (b) Prior to the execution of a transaction recommended to a non-institutional customer . . . a member shall make reasonable efforts to obtain information concerning: (i) the customer's financial status; (i1) the customer's tax status; (iii) the customer's investment objectives; and (iv) such other information used or considered to be rea- sonable by such member or registered representative in making recommendations to the customer. 8 which the customer intends to exercise independent judgment in evaluating a member’s recommendation”). This obligation is imposed on the broker’s registered representative at the point of sale (i.e., the point at which the investor—and his or her individual investment criteria—can be identified and considered). Within the framework of the Suitability Rule, the NASD Notice specifically states: When a registered representative recommends the purchase of a variable annuity for any tax- qualified retirement account (e.g., 401(k) plan, IRA), the registered representative should dis- close to the customer that the tax deferred accrual feature is provided by the tax-qualified retirement plan and that the tax deferred accrual feature of the variable annuity is unnecessary. The registered representative should recommend a variable annuity only when its other benefits, such as lifetime income payments, family pro- tection through the death benefit, and guaran- teed fees, support the recommendation. (Pet. App. E at 25a (emphasis added).) Therefore, the plain language of NASD NTM 99-35 only applies to registered representatives recommending the variable annuity. The Second Circuit considered the plain language of NASD NTM 99-35, and specifically found that it did not apply to this case: As the district court correctly observed, neither NASD Notice 99-35 nor SEC Form N-4 imposes a duty on defendants to include in its prospec- tuses the warning sought by plaintiffs. By its terms, NASD Notice 99-35 applies only to reg- istered representatives recommending the pur- 9 chase of a variable annuity; it does not require annuity issuers to include a warning in a prospec- tus or other offering documents. (Pet. App. A at 4a. (emphasis added).) Thus, the Second Circuit held that NTM 99-35 did not apply to American Skandia, but only to the registered representatives working at the point of sale. Notwith- standing, the Second Circuit further considered the rel- evance of NASD NTM 99-35, and found that it did not apply because the prospectuses did not recommend the purchase of the variable annuities: Even if the [NASD] Notice did apply to issuers, the prospectus challenged in this case does not recommend the purchase of annuities; it says only that annuities “may be a suitable” invest- ment. Indeed, the prospectus specifically advises prospective investors to seek professional tax advice before purchasing annuities for use in a qualified plan. Prospectus at 41. (Pet. App. at 4a-5a (emphasis added).) As Petitioners concede, and as Judge Pollack correctly found, American Skandia did not recommend that Peti- tioners purchase variable annuities for their retirement accounts. This determination was made by an indepen- dent broker-dealer, who Petitioners did not name as a defendant in this action. As Judge Pollack noted: “Plain- tiffs are not, however, bringing any charges against the broker from whom they purchased the variable annuity.” (Pet. App. B at 9a.) Despite the plain language of NASD NTM 99-35, Petitioners argue that every other court that has decided the issue has disagreed with the Second Circuit. (Pet. 13- 14.) Petitioners cite to three district court cases in sup- port of their argument. These cases, however, do not warrant this Court’s review for two reasons. 10 First, alleged conflict between a court of appeals and district court opinions are insufficient to warrant this Court's review. Uniformity in federal matters is achieved when this Court reviews various court decisions that are otherwise final in the absence of Supreme Court review. This is not the case. Second, there is no conflict because the three district court cases are factually distinguishable from this case. In two of the cases, the courts found that the issuer was, in effect, acting as the registered representative—thus falling within the purview of NASD NTM 99-35. In Drnek vy. Variable Annuity Life Ins. Co., No. CIV 01- 242-TUC-WDB, 2004 WL 1098919, at *3 (D. Ariz. May 4, 2004), the district court denied defendants’ motion to dismiss, finding that because defendants sold the vari- abie annuity directly to plaintiffs, this created a “rela- tionship of trust between buyers and sellers. . . which would create a duty to inform the buyers” of the infor- mation contained in the NASD Notice. Similarly, in Nel- son v. Pac. Life Ins. Co., No. Civ. A. CV 203-131, 2004 WL 1592617, at *4 (S.D. Ga. July 12, 2004), the district court denied defendants’ motion to dismiss, highlighting that plaintiffs alleged a principal-agency relationship with the registered representative who sold the variable annuity to plaintiffs. Petitioners have not alleged a prin- cipal-agency relationship between American Skandia and the registered representative who sold them the vari- able annuities at issue; in fact, they are unable to do so because Petitioners did not purchase the variable annu- ities in question from American Skandia, but from an independent broker-dealer.’ + This same principle distinguishes the NASD enforcement cases upon which Petitioner seek to rely. See NASD Dep't of Enforce- ment v. Am. Express Fin. Advisors, Inc., No. CAFO020057, NASD Letter of Acceptance, Waiver and Consent (Nov. 12, 2002) (finding 11 Finally, in Johnson v. Aegon USA, Inc., C.A. No. 1:01- CV-2617-CAP, 2004 U.S. Dist. LEXIS 20471 (N.D. Ga. Sept. 20, 2004), the district court made a factual deter- mination regarding the disclosure in a prospectus dif- ferent from the one at issue here. Petitioners have not provided any evidence that there is any similarity between American Skandia’s prospectuses and those at issue in Johnson. The fact that the district court in John- son denied defendants’ motion to dismiss after review- ing a different prospectus does not conflict with the Second Circuit’s opinion. That three district court opin- ions, interpreting different prospectuses and under dif- ferent factual circumstances, reached different conclusions than the Second Circuit, does not call the Second Circuit’s opinion into question. In arguing that NASD Rules deserve judicial defer- ence Petitioners mischaracterize this case, because there is no NASD Rule at issue. Here, the document at issue is simply an NASD Notice to Members, which the NASD recognizes is not mandatory. An NASD Notice to Members, which only suggests guidelines, does not deserve judicial deference. In its own words, the NASD is a private not-for-profit corpo- ration chartered in Delaware. See NASD Respondent's Brief in Opposition On Petition for Writ of Certiorari in Desiderio v. NASD, Inc., Case No. 99-1285, 1999 WL 33640362, at *2 (U.S.); see also Desiderio v. NASD, Inc., 191 F.3d 198, 206 (2d Cir. 1999), cert. denied, 531 U.S. 1069 (2001) (holding the NASD is a private—not registered representative violated NASD Conduct Rules in enforce- ment action arising out of registered representative's failure to make certain oral disclosures at the point of sale); NASD Dep’t of Enforce- ment v. Am. United Life Ins. Co., No. CO5010011, NASD Regulation, Inc. Office of Hearing Offices, Order Accepting Offer of Settlement (2002) (same). 12 state—actor). Although it is registered with the SEC as a self-regulatory organization pursuant to 15 U.S.C. § 780-3(a), it was not created by statute. /d. Neither its directors nor its executives are governmental officials or appointees. /d. It receives no funding from any govern- ment, federal or state. /d. It has the power to govern the conduct of its members by virtue of the contractual rela- tionship between it and its members. Klitzman v. Bache Halsey Stuart Shields Inc., 499 F. Supp. 255, n.1 (S.D.N.Y. 1980). As such, neither NASD Rules nor Notices are binding on parties that are not NASD mem- bers. As defined by this Court, judicial deference is due to a governmental agency where there is an express con- gressional authorization to engage in rulemaking or adjudication process that produces a rule or regulation. Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). This is known as Chevron defer- ence. This Court has also extended a lower standard of deference to a governmental agency's interpretations of its own rules. United States v. Mead Corp., 533 U.S. 218 (2001). This is referred to as Skidmore deference. How- ever, this Court has specifically found that interpreta- tions contained in opinion letters, and particularly those that were not arrived at after a formal adjudication or notice-and-comment rulemaking process, do not deserve judicial deference. Christensen v. Harris County, 529 U.S. 576, 587 (2000). No court, however, has extended any level of judicial deference to non-mandatory sug- gestions of a private corporation, such as the NASD. Petitioners’ assertion that an NASD Rule deserves judicial deference is nothing more than an academic argument. In this case, the idea that an NASD Notice to Members, which has no effect on non-members, should carry the force of law is meritless, and does not deserve 13 this Court's attention. As such, Petitioners have failed to raise an important question of federal law that this Court should address. Il. THE DECISION OF THE SECOND CIRCUIT DID NOT CONTRAVENE SUPREME COURT PRECEDENT A. The Second Circuit Court Of Appeals Did Not Contravene Supreme Court Precedent When It Did Not Give Judicial Deference To A Joint SEC/NASD Report In a last ditch effort to revive their losing cause, Peti- tioners implored the Second Circuit to consider a joint report issued by SEC staff and the NASD entitled “Joint SEC/NASD Report on Examination Findings Regarding Broker-Dealer Sales of Variable Insurance Product” (“Report”). See Office of Compliance Inspection and Examinations, United States Securities and Exchange Commission/NASD “Joint SEC/NASD Report on Exam- ination Findings Regarding Broker-Dealer Sales of Vari- able Insurance Product” (available at Attp:// www.sec. gov/news/studies/secnasdvip.pdf). Petitioners argue that by failing to give the Report judicial defer- ence, the Second Circuit contravened this Court's prece- dent. (Pet. at 26-27.) However, Petitioners’ argument is unavailing for three reasons. First, the Report was not issued until June 9, 2004—almost four years after the class period and some three weeks after the Second Cir- cuit’s decision.* Second, a report that explicitly does not 4+ On May 14, 2004, the Second Circuit issued its unpublished opinion. On May 28, 2004, Petitioners filed a Petition for Rehearing and Petition for Rehearing En Banc. Subsequently, on July 15, 2004, Petitioners filed a letter with the Clerk of Court for the Second Cir- cuit asking the panel take into consideration the Report in question. The Petition for Rehearing was denied on July 30, 2004. Therefore, 14 represent the views of the SEC is not entitled to judicial deference. And third, contrary to Petitioners’ contention, the Report does not support their position. American Skandia does not dispute the fact that rules promulgated by the SEC pursuant to its rulemaking authority carry with it the force of law, i.e., Chevron deference. Rule 10b-5, which is promulgated under 15 U.S.C. § 78w(a), is a prime example of such a rule deserving judicial deference. However, as this Court has clearly held, interpretations, such as opinion letters, “which are not the result of a formal adjudication or notice-and-comment process,” lack the force of law, and therefore are not necessarily accorded judicial deference. Christensen, 529 U.S. at 587; see also Alaska Dep't of Envtl. Conservation v. Envtl. Prot. Agency, 540 U.S. 461, 487 (2004) (holding that an agency’s interpretation contained in an internal guidance manual does not deserve judicial deference); Clackamas Gastroenterol- ogy Assocs., P.C. v. Wells, 538 U.S. 440, 449 n.9 (2003) (holding that the EEOC’s compliance manuals are not controlling); Perez-Gonzales v. Ashcroft, 379 F.3d 783, 793-96 (9th Cir. 2004) (finding that agency interpreta- tion contained in a guidance memorandum that con- flicted with immigration statutes did not deserve deference); Air Brake Sys., Inc. v. Mineta, 357 F.3d 632, 642-43 (6th Cir. 2004) (finding that the opinion letters of the chief counsel of the NHTSA are too informal to merit judicial deference); Echeverria v. Chicago Title & Trust Co., 256 F.3d 623, 630 (7th Cir. 2001) (holding that judicial deference is not due to “unofficial inter- pretations which the agency itself does not view as bind- _ it was impossible for the Second Circuit panel that originally decided the case to have disregarded a report that did not exist. Moreover, as discussed infra, the Second Circuit in deciding a Petition for Rehear- ing was not obligated to rely on a report which does not represent the views of the SEC. 15 ing”); Ganino v. Citizens Utils. Co., 228 F.3d 154, 163 (2d Cir. 2000) (holding that, unlike an SEC rule pro- mulgated pursuant to its rulemaking authority, an SEC Staff Accounting Bulletin, “does not carry with it the force of law”). The Report specifically states that “[t]his report rep- resents the findings of the Staff of the Commission and NASD, and not the Commission itself.” Report at 3 n.1 (emphasis added). There is no basis to argue that a report by the staff, not adopted by the SEC, carries with it the same force of law as, for example, Rule 10b-S5. In the words of this Court, it is a summary of findings, “not one arrived at after, for example a formal adjudication or notice-and-comment rulemaking. Interpretations such as those in opinion letters, like interpretations contained in_ policy statements, agency manuals, and enforcement guidelines, all of which lack the force of law—do not warrant Chevron-style deference.” Christensen, 529 U.S. at 587 (internal citation omitted). As such, this Report does not merit judicial deference. Moreover, Petitioners mischaracterize the content and import of the Report. This Report does not mandate that issuers of variable annuities prospectuses include any specific language within their prospectus. The Report “is not a comprehensive roadmap for compliance aid super- vision with respect to the sale of variable insurance products, but rather points out examples of common problems that may be encountered, and some measures that firms are using to ensure better compliance.” Report at 3. The section Petitioners quote from is entitled “Dis- closure” and states: With regards to sales of annuities in tax-quali- fied plans, the NASD states that when a regis- tered representative recommends the purchase of a variable annuity for any tax-qualified retire- 16 ment account (e.g., 401(k) plan, IRA), the reg- istered representative should disclose to the cus- tomer that the tax-deferred accrual feature is provided by the tax-qualified retirement plan and that the tax-deferred accrual feature of the variable annuity is unnecessary. Report at 18 (emphasis added). Notwithstanding Petitioners’ implication to the contrary, the Report does not state that an issuer of a variable annuities prospectus is mandated to include any lan- guage within its prospectus. The Report simply states that registered representatives should—not must— inform their customers that if is unnecessary to purchase a variable annuity for its tax-deferred feature for a tax- qualified retirement plan. This is a far cry from man- dating the issuer of the prospectus to set forth this language in a prospectus that goes to all potential investors irrespective of their individual investment con- cerns.° Petitioners’ argument that this Report deserves judi- cial deference is not in accord with Supreme Court precedent, and is not supported by the Report itself. As such, Petitioners’ claim that the Second Circuit’s opin- ion contravenes this Court’s precedent is meritless. ° Further detracting from Petitioners’ argument is the fact that the NASD is in the process of proposing a new rule regarding variable annuity sales. See April 26, 2004 NASD News Release “NASD Pro- poses Specific Requirements for Deferred Variat!e Annuity Sales, Concern Over Suitability, Disclosure, Supervision Cited” (available at http://www.nasd.com/stellent/idcplg ?IdcService=SS_GET_PAGE &ssDocName=NASDW_002835 &ssSourceNodeld=553). This release highlights the key requirements of the proposed rule. Most tellingly, there is absolutely no mention of any duty imposed on issuers of vari- able annuities prospectuses. The proposed rule focuses exclusively on registered representatives. 17 B. The Second Circuit Court of Appeals Did Not Contravene Supreme Court Precedent When It Dismissed the Complaint As previously noted, both Judge Pollack and a unan- imous panel of the Second Circuit found that the Amer- ican Skandia prospectuses did not contain any material omissions. Petitioners contend that the Second Circuit's decision contravened this Court’s precedent by deter- mining materiality as a matter of law, as opposed to allowing the issue to go to the trier of fact. (Pet. at 27.) However, as this Court has recognized time and again, materiality can be determined as a matter of law if the alleged omission is obviously unimportant in light of the disclosures made. Moreover, even if the factual deter- mination of the Second Circuit was incorrect, this unpublished decision is not enough to merit this Court's review. It is well established by this Court that an “omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding” how to act. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). Stated another way: “there must be 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.” /d. It is equally well-settled that “only if the established omissions are ‘so obviously important to an investor, that reasonable minds cannot differ on the question of materiality’ is the ultimate issue of materiality appro- priately resolved ‘as a matter of law’. . ..” Id. at 450. After carefully reviewing the prospectuses, Judge Pol- lack aptly concluded: 18 Nor do the allegedly omitted facts significantly alter the total mix of information made avail- able. The Prospectuses clearly state that both variable annuities and tax qualified retirement plans are tax deferrable. That is enough to alert all reasonable investors to the fact that it is unnecessary, if solely for tax reasons, to use a variable annuity to fund a tax-deferred retire- ment account. See In re NBTY, Inc., Sec. Litig., 224 F. Supp.2d 482, 495 (E.D.N.Y. 2002); Jn re Ultimate Corp. Sec. Litig., No. 85 CIV. 5944 (CSH), 1989 WL 79372, at *5 (S.D.N.Y. July 11, 1989) (“Liability does not arise from the failure to disclose that which should be obvious to the average investor.”). The other benefits of the variable annuities are also clearly set forth, as well as the fee structure for purchase of the annuity. The disclosures in the Prospectuses, taken in context, conclusively disprove the materiality of the alleged omissions and are thus fatal to the Plaintiffs’ claims. (Pet. App. B at 10a-1 1a. (emphasis in original).) The Second Circuit conducted a de novo review of the record and the prospectuses at issue, and likewise con- cluded that the American Skandia prospectuses con- tained no material omission: Nor did the failure to include the warning sought by plaintiffs constitute a material omission. An Omission 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.” Basic, Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); accord Ganino vy. Citizens Utils. Co., 228 F.3d 161-62. 19 Here the prospectus clearly states that the invest- ment gains on annuities are not taxable “until an amount is received (a ‘distribution’ ),” Prospec- tus at 39, and that contributions to qualified retirement plans are “not taxable until distribu- tions are made,” Prospectus at 42. From this information, the reasonable investor would know that, since taxes on qualified retirement plans are not assessed until a distribution is made, funding: a replacement fund with deferred annuities would provide no additional tax advantage. Adding a warning stating that the tax-deferred feature of a deferred annuity is “unnecessary” when the annuity is to fund a qualified retire- ment plan investments thus would not have “sig- nificantly altered the total mix of information” in the prospectus. (Pet. App. A at 5a-6a.) Both Judge Pollack and the Second Circuit indepen- dently reviewed the prospectuses with painstaking care and correctly decided that the alleged omission was not material as a matter of law. These factual determinations do not contravene this Court’s precedents. Even if, arguendo, the Second Circuit did erroneously decide this case, it is still insufficient to warrant review by this Court. The Second Circuit’s unanimous decision was an unpublished summary order. Pursuant to Second Circuit Local Rule 23, unpublished opinions cannot be cited as precedential authority to any court, including to the Second Circuit. See United State Court of Appeals for the Second Circuit, Local Rule 23 (available at http://www.ca2.uscourts.gov/). In other words, the deci- sion of the Second Circuit has no binding effect on any court. Thus, if confronted with a factually similar case, the Second Circuit could reach a different decision. 20 The Second Circuit made a complex factual determi- nation based on the specific facts of this case; it did not conflict with this Court’s jurisprudence. Petitioners’ argument to the contrary is unavailing. CONCLUSION For the reasons set forth above, the Petition for a Writ of Certiocari should be denied. LEIV H. BLAD, JR. JAMES N. BENEDICT ROBERT G. HOUCK Counsel of Record ANDREA GOLDBARG MILBANK, TWEED, HADLEY CLIFFORD CHANCE US LLP & MCCLoy LLP 31 West 52nd Street One Chase Manhattan Plaza New York, NY 10019 New York, NY 10005-1413 (212) 878-8000 (212) 530-5000 Attorneys for Respondents --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386003_1528%3A2. Public record. Not legal advice.