Federal Law Does Not Bar Class Actions Alleging Breach Of Fiduciary Duty Related To Fee-Based Securities Accounts

In Anderson v. Edward D. Jones & Co., L.P., No. 19-17520 (9th Cir. Mar. 4, 2021), plaintiff investors brought a class action against defendant stockbrokers for allegedly violating federal securities laws and state-law fiduciary duties when they convinced the investors to switch from commission-based accounts to fee-based accounts even though the latter were not suitable for them and their low-trade, “buy-and-hold” investment strategies.

The district court dismissed the action. Relevant to the appeal, the district court concluded that it lacked subject matter jurisdiction over the fiduciary duty claims because the Securities Litigation Uniform Standards Act (SLUSA) barred the investors from bringing their claims as a class action. See 15 U.S.C. § 78bb(f)(1), (f)(5)(B).

Congress enacted SLUSA to prevent plaintiffs from bringing state-law class actions designed to evade limitations on frivolous or abusive federal securities class actions. For the SLUSA bar to apply to a class action, a defendant’s alleged misrepresentation or omission must be made in connection with the purchase or sale with a security listed on a national security.

The Ninth Circuit reversed on appeal. The investors’ allegations were that the stockbrokers caused them to switch into fee accounts that were not suitable for them because they did not trade often and they paid more in their new accounts because fees were assessed on the size of their portfolios, as opposed to commissions on each transaction. Because the stockbrokers’ alleged misrepresentations and omissions related the different accounts’ fee structures, and not to any listed securities, SLUSA did not apply and did not bar the investors’ class action.

Persons seeking advice regarding these, or other securities and investment law matters, should contact Wright, L’Estrange & Ergastolo’s Business & Complex Civil Litigation practice group.

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