NEWS WRAP - Brokerage Merger Challenge Dismissed on Technical Grounds

The antitrust lawsuit against the merger of investment brokers Charles Schwab and TD Ameritrade has been dismissed by the U.S. District Court for the Southern District of New York.

However, the decision is unlikely to be the end of the matter as the dismissal was made on procedural grounds with the court ruling that the plaintiff, BlackCrown Inc., is a corporate entity and therefore cannot represent itself. The judge cited the 1993 case of Rowland v. California Men's Colony and the 1997 decision reached in Pridgen v. Anresen as forming the basis for the court's decision.

BlackCrown Inc. is likely to be ruing its decision not to instruct counsel.

"BlackCrown Inc. must retain an attorney should it wish to prosecute this case. Because BlackCrown Inc. has attempted to proceed with this action pro se, it must be dismissed. The Clerk of Court is directed to close this case," said the court*.

It is likely that BlackCrown Inc. will seek to refile the case, but this time with counsel.

A question of competition

BlackCrown Inc., a private acquisition company that specialises in real estate disruption, had argued that the merger of TD Ameritrade and Charles Schwab would end competition between the two firms and would disadvantage both independent independent financial advice clients and their advisers, with smaller wealth management advice firms – i.e. those with less than $200 million in client assets under management – the most likely to suffer harm.

Schwab and Ameritrade don't just provide brokerage services, they also act as RIA custodians for assets managed by U.S. Securities & Exchange Commission registered independent financial advice firms. Schwab already dominates the RIA market, accounting for around half the value of the total market; Ameritrade is the third largest player with around a 20% share.

As such, the merger may be in violation of Section 7 of the Clayton Act – an area of law the Supreme Court explored in United States v. Phila. Nat'l Bank [1963]). However, unless BlackCrown Inc. instructs legal advice, this may not be tested.

Furthermore, the merger would also impact the retail financial services market. This is because Schwab is currently the fourth largest player, with Ameritrade not far behind in seventh. The merger would make the new entity the third largest in the market, with an estimated $5 trillion in client assets.

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