The U.S. Second Circuit Court of Appeals of New York ruled July 10 that broker-dealers do not have to disclose trailing payments received from fund firms. The court ruled that such fees are already disclosed in funds' prospectuses and statements of additional information.

In a lawsuit against Quick & Reilly, a shareholder, Donald Press, claimed that a trailing fee the fund firm paid to the brokerage, influenced the brokerage's placement of his money into money market funds. Press claimed Quick & Reilly was fraudulent in not reporting the trailing fees, according to Wechsler Harwood Halebian & Feffer of New York, which represents Press.

The Investment Company Act requires broker-dealers to disclose any remuneration received in connection with a consumer transaction, according to the Securities Exchange Commission. In a brief filed in support of Quick & Reilly, the SEC said it was sufficient to disclose the trailing fees in the funds' prospectuses.

"I believe the court misread the SEC's brief," said the plaintiff's lawyer, Stuart Wechsler, senior partner at Wechsler Harwood. "This [ruling] allows brokers to continue to conceal fees and to continue to get away with limited disclosure. You are less likely to read a 100-page document you get once a year than your confirmation statement that you get once a month. Nobody can assume from the prospectus that their broker is getting a substantial commission on their account."

The ruling could set a bad precedent for protecting companies, Wechsler said. The firm has already filed for a rehearing, although they are rarely granted, Wechsler said. A Quick and Reilly spokesperson could not be reached for comment.

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