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From Securities Regulation Daily, September 4, 2018

Vanguard can’t connect SLUSA to bar brokerage fee suit

By John M. Jascob, J.D., LL.M.

The Securities Litigation Uniform Standards Act (SLUSA) did not bar claims that the Vanguard Group overcharged a class of brokerage customers for the execution of certain securities trades. Relying on the U.S. Supreme Court’s decisions in both Troice and Dabit, the Third Circuit held that the overcharges of commissions did not have a "connection that matters" to the transactions at issue because they were not objectively material to the decision to purchase securities from Vanguard. As SLUSA preclusion did not apply, the investors’ breach of contract claim could proceed (Taksir v. Vanguard Group, September 4, 2018, Chagares, M.).

Two-dollar brokerage. The plaintiffs are Vanguard customers whose holdings allegedly met the required $500,000 balance threshold for receiving the $2 brokerage commissions advertised on Vanguard's website. After the customers were charged a $7 commission for two purchases of Nokia Corporation’s stock, they requested a refund of the fee difference. Vanguard denied the request, however, responding that the plaintiffs’ accounts were not eligible for trading discounts because of IRS nondiscrimination rules.

The customers then filed the instant lawsuit in the Eastern District of Pennsylvania, claiming that Vanguard had breached the brokerage agreement and violated the Pennsylvania Unfair Trade Practices and Consumer Protection Law (UTPCPL) by overcharging sales commissions to clients who met the required balance thresholds. Although ultimately dismissing the UTPCPL claims, the district court concluded that SLUSA did not bar the breach of contract claims and allowed those claims to go forward.

No SLUSA connection. On appeal, Vanguard contended that SLUSA nevertheless barred the suit because the overcharge constituted a misrepresentation "in connection with" the purchase or sale of a covered security. Specifically, Vanguard argued that the district court erred by relying on the Supreme Court’s interpretation of the "In connection with" requirement in Chadbourne & Parke LLP v. Troice (U.S. 2014) instead of the high court’s earlier ruling in Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit (U.S. 2006).

The Third Circuit disagreed, however, observing that the Troice majority expressly rejected the contention that its interpretation of "in connection with" differed from the Dabit interpretation of that phrase. Moreover, each of the appellate cases that Vanguard cited from the Seventh, Eighth, and Ninth Circuit was distinguishable because each case involved the direct breach of a duty that a broker-dealer owes customers pertaining to a securities transaction. The Third Circuit reasoned that the misconduct in those cases was plainly material to the customers, and the connection between the misconduct and the transaction was much closer than the connection between the overcharges and trades at issue here. In addition, the Seventh and Ninth Circuits have concluded that inflated commissions do not trigger the SLUSA bar.

Materiality. Turning to the issue of materiality, the appellate panel agreed with the district court that a reasonable investor would not be swayed by the overcharges on the facts of the case. The district court properly drew a distinction between the limited, non-recurring commission fees at issue here and the secret side payments regularly deducted from an investor’s account in Goldberg v. Bank of America (7th Cir. 2017). The Third Circuit also agreed with the district court's distinction between the incidental and low-value commission overcharges in the instant case and the "best execution" cases where a broker’s alleged false promise to obtain the best available price would be material to customers. Finally, the single-digit differences in trading commissions were objectively immaterial, the appellate panel opined, given that the reduced commissions were available only for customers with at least $500,000 invested in Vanguard accounts. Accordingly, the SLUSA bar did not apply, and the investors’ breach of contract claim could proceed.

The case is No. 17-3585.

Attorneys: Christopher L. Nelson (The Weiser Law Firm, P.C.) for Alex Taksir. Stuart T. Steinberg (Dechert LLP) for The Vanguard Group.

Companies: The Vanguard Group

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