Some background first.
There are two types of investors. One type are people who own stocks and hold 'em forever, and trade very little. My mother's like this. (So am I, mostly.)
Then there are people who trade more frequently; from the "every month or so" to daytraders and the like.
There are also two types of fee structures for brokerage accounts. One type of account -- the "usual" (in my experience) -- just charges commissions every time you trade. The other type of account charges a set amount -- for example, 1% of the value of your account -- every year.
The "commission" arrangement is clearly better for the buy-and-hold/rarely trade crowd. Whereas the alternative might be better for the frequent trader.
But the brokerage house itself obviously has a different interest. They'd love to charge mom-and-pop, buy-and-hold investors the annual one percent (or more) fee structure if they could.
Recognizing this conflict of interest, FINRA has a rule: “Broker-dealers must ensure that fee-based accounts are only recommended to those clients for whom they are suitable; as such accounts tend to be more expensive for clients who engage in little to no trading activity.”
With that backdrop, here's the lawsuit.
Plaintiff files a putative class action that says that Edward D. Jones & Co. manipulates mom-and-pop investors into switching to "annual fee" accounts even though such a structure is clearly unsuitable. My guess is that Plaintiff's correct that, yep, that occurs. The trial court dismisses the lawsuit with prejudice, holding that the Securities Litigation Uniform Standards Act -- SLUSA -- preempts the state law claims. SLUSA bars state law fiduciary duty claims if those claims are “in connection with the purchase or sale of a covered security.” The district court held they were.
I won't claim to be the world's greatest expert on SLUSA. But I am glad the case comes out this way. If Edward Jones in fact did what they're alleged to have done, I hope they get spanked.
