On March 4, 2021, the United States Court of Appeals for the Ninth Circuit reversed a district court’s ruling and held that a putative class action alleging state-law fiduciary duty claims against a financial services and advisory firm (the “Financial Advisor”) could proceed despite the Securities Litigation Uniform Standards Act (“SLUSA”)’s bar on state-law securities class actions. Anderson v. Edward D. Jones & Co., L.P., No. 19-17520 (9th Cir. Mar. 4, 2021). Plaintiffs, clients of the Financial Advisor, alleged that the Financial Advisor had breached its fiduciary duties to them when switching from a per-transaction fee structure to a flat, annual-percentage-fee structure without conducting a suitability analysis for each client. Plaintiffs also cast the Financial Advisor’s failure to disclose that it had not conducted a suitability analysis as an omission actionable under Section 10(b) of the Securities Exchange Act of 1934. The district court dismissed the federal securities claims and held that the court lacked jurisdiction over the state-law claims due to the SLUSA bar. The Ninth Circuit reversed on the jurisdictional issue.
Plaintiffs alleged that they were investors with the Financial Advisor who were “buy-and-hold clients” and who conducted little to no trading each year. They had invested with the Financial Advisor on a per-transaction fee structure, receiving free financial advice and paying only when conducting trades. In 2008 the Financial Advisor introduced a new model under which investors would be charged a flat annual fee—1.35-1.5% of the client’s assets under management. Plaintiffs elected to switch to the new model but allege that, because they trade infrequently, their new fees were now higher than under the per-transaction model. Plaintiffs then filed this lawsuit, alleging that the Financial Advisor had failed to perform a suitability analysis for each of them to determine if the new fee structure was appropriate for them. Plaintiffs contended that this failure, combined with the Financial Advisor’s internal incentives to its employees to move their clients to the new fee structure, was a breach of fiduciary duty under Missouri and California law. Plaintiffs also included claims under the federal securities laws, alleging that the Financial Advisor’s failure to disclose that it had not performed this analysis was a material omission.
The district court dismissed the federal securities claims based on disclosures the Financial Advisor had made to plaintiffs before they switched to the annual flat fee. The district court also dismissed the state-law fiduciary duty claims under SLUSA. SLUSA was enacted to prevent state-law class actions from being used as a vehicle to obviate the heightened pleading standards of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) and bars state-law class actions alleging misrepresentations, omissions, or other manipulative or deceptive devices “in connection with the purchase or sale of a covered security.” The district court reasoned that plaintiffs could not bring both a state-law fiduciary class action claim and a federal securities claim based on the same conduct without triggering the SLUSA bar.
The Ninth Circuit reversed. The Court explained that although SLUSA prohibits state-law claims that could have been federal securities-fraud claims, the fact that plaintiffs had tried and failed to allege a federal securities claim did not automatically trigger the prohibition. The Court then went on to the core issue of whether the state-law claims were “in connection with the purchase or sale of a covered security” and held that they were not. Focusing on the materiality of the alleged misrepresentation or omission about the new fee structure, the Court concluded, “[c]hoosing a broker or specific type of account is fundamentally different than choosing to buy or sell a covered security.” The Court noted in particular that plaintiffs had not alleged that they would have purchased or sold different securities had they not changed fee structures.
The border between state-law fiduciary claims and federal securities law violations remains ill defined. As the Court noted here, fiduciary cases involving kickbacks to brokers or other failures of best execution likely do overlap sufficiently with the securities laws to trigger the SLUSA class-action bar, but the Court also noted that SLUSA is not boundless and “does not transform every breach of fiduciary duty into a federal securities violation.” The decision here indicates that the Ninth Circuit will: (a) likely continue to interpret SLUSA narrowly, so if a financial advisor or other fiduciary is engaging in securities transactions on behalf of their clients, they may not able to rely on the protections of the PSLRA; and (b) allow plaintiffs to continue to plead in the alternative such that if a securities law claim fails, they may be able to fall back on a state-law class action claim.
