[00:00:00] Speaker 04:
Good morning your honor Anthony Brown for the for the plaintiffs and the appellants and I'd like to reserve three minutes for rebuttal Your honors in just four years between 2014 and 2018

[00:00:14] Speaker 04:
Edward Jones doubled the percentage of advisory program assets that were under the company's management.

[00:00:20] Speaker 04:
When they did that, they doubled the fee-based revenue, and their fee-based revenue went from $3 billion to $6 billion, which accounted for about 80% of its total revenue.

[00:00:32] Speaker 04:
And a lot of that was due to the conduct that's alleged in this case, specifically,

[00:00:39] Speaker 04:
Edward Jones had many small investors, people who were investing $200,000 or less, that were in brokerage accounts that charged commissions only.

[00:00:49] Speaker 04:
Edward Jones recommended that they switch their accounts, the entire investment vehicle, from the commission-based accounts to advisory fee-based accounts that charged higher fees.

[00:01:01] Speaker 04:
And as a result, they ended up making more money.

[00:01:05] Speaker 04:
It was clearly in the interest of Edward Jones to do that.

[00:01:08] Speaker 04:
It was not in the interest of the plaintiffs to move their accounts over because in the long run.

[00:01:12] Speaker 02:
So we know these facts and we have read your briefs.

[00:01:15] Speaker 02:
Could you address the issues we asked about in our oral argument order about the Worthingtons in particular and when they switched their account?

[00:01:24] Speaker 02:
what the source of the fiduciary duty was and the other questions that we asked.

[00:01:29] Speaker 04:
I can't.

[00:01:30] Speaker 04:
The court asked whether there was some substantive difference between the fiduciary duty that was owed to the Worthingtons when they switched the trust account over.

[00:01:38] Speaker 04:
And the answer to that is really no.

[00:01:40] Speaker 04:
And to answer that question, I have to go back to the beginning, which says in California, whether you're a broker or a financial advisor, you have a fiduciary duty to your client.

[00:01:52] Speaker 04:
It's really that easy.

[00:01:53] Speaker 02:
So in your brief, when you talk about the California fiduciary duty, it's pretty sparse, but what I understood was a lot of stuff about control.

[00:02:02] Speaker 02:
And I don't think you really said that these financial professionals were exerting control over these accounts.

[00:02:11] Speaker 04:
We're not saying anything about control.

[00:02:12] Speaker 04:
That's Edward Jones's argument.

[00:02:14] Speaker 04:
Our argument doesn't have anything to do with control.

[00:02:16] Speaker 02:
So where are the cases you've pointed us to where there's a fiduciary duty in California to act in the client's best interest in the absence of control by the

[00:02:23] Speaker 02:
by the financial process.

[00:02:26] Speaker 04:
You're going to have to give me a second to get there because it takes a little bit of backing up.

[00:02:30] Speaker 04:
Look at Duffy and Twomey and in both of those cases the court recognizes that whether you're a broker or a financial advisor you owe a fiduciary duty.

[00:02:40] Speaker 04:
What is a fiduciary duty in its essence?

[00:02:43] Speaker 04:
It is the duty to act in the utmost

[00:02:46] Speaker 04:
bet in the utmost, I'll quote it for you, the duty of the broker being a fiduciary character must be exercised with the utmost good faith and integrity.

[00:02:54] Speaker 04:
That's Duffy.

[00:02:57] Speaker 04:
There's no question that that's what the fiduciary duty is.

[00:03:01] Speaker 04:
The question in this case is how do you apply that under the particular circumstances of what happened here?

[00:03:09] Speaker 04:
to do that you have to ask yourself what's going on?

[00:03:12] Speaker 04:
Are they offering transaction advice about what investments to put their money in or are they offering advice about whether you should be in a commission based brokerage account or in a fee based advisory account?

[00:03:26] Speaker 04:
It's a different kind of inquiry.

[00:03:28] Speaker 04:
If it's just

[00:03:29] Speaker 04:
whether or not you should be investing in a specific security, the question about the control over the account matters.

[00:03:36] Speaker 04:
And there's a sliding scale there.

[00:03:37] Speaker 04:
Because obviously, if you're the kind of investor who says, look, I know what I'm doing.

[00:03:42] Speaker 04:
You just leave it up to me.

[00:03:43] Speaker 04:
I'm going to tell you what to invest in.

[00:03:45] Speaker 04:
I just want you to broker the transaction.

[00:03:49] Speaker 04:
Then there's a lower fiduciary duty.

[00:03:51] Speaker 04:
But if you're a brokerage client, and this is what happened in the case.

[00:03:54] Speaker 04:
You're a brokerage client with Edward Jones.

[00:03:58] Speaker 04:
They say, we want you to come in.

[00:04:00] Speaker 04:
We're inviting you to come in to speak with our financial advisor.

[00:04:03] Speaker 04:
We want to offer you some advice about your financial future.

[00:04:08] Speaker 04:
We're going to do some pamphlets.

[00:04:11] Speaker 04:
We're going to look at our options that are available.

[00:04:14] Speaker 04:
We're going to ask you some questions.

[00:04:15] Speaker 04:
And then we're going to recommend to you

[00:04:18] Speaker 04:
to move from your brokerage account to the fee-based advisory account, okay?

[00:04:24] Speaker 04:
So these are not, these are pre-existing clients.

[00:04:28] Speaker 04:
They're people who were already, you know, had trust in their brokers, Edward Jones, for the advice that they were offering.

[00:04:36] Speaker 04:
And they were being invited in.

[00:04:37] Speaker 04:
It's not like someone walked off the street and came into Edward Jones and they said, I see you got a bunch of pamphlets over there.

[00:04:43] Speaker 04:
about all of the options that are available.

[00:04:45] Speaker 04:
Can you give me some of them?

[00:04:46] Speaker 04:
I'll review them and then I'll tell you if I want to exercise my option to, you know, choose an advisory account or something else.

[00:04:55] Speaker 04:
These people were brought in specifically for the purpose to go over their making good choices pamphlet and then Edward Jones said after that inquiry and after that invitation, after bringing them into the office, they said, this is what we recommend to you.

[00:05:14] Speaker 01:
I understand your primary argument about California's fiduciary duty.

[00:05:22] Speaker 01:
I think it is complicated by our own still binding presidential decision.

[00:05:28] Speaker 01:
I think that's how you pronounce it.

[00:05:31] Speaker 01:
And I think there's at least arguably some nuance to the California fiduciary duty and scope and

[00:05:40] Speaker 01:
how it would apply to the facts of this case.

[00:05:43] Speaker 01:
But assuming for the sake of argument that the district court's understanding of the fiduciary duty was correct and it was more limited essentially for some of the plaintiffs here, then we get to the question of our focus order.

[00:06:00] Speaker 01:
I understand your primary argument is there is a high fiduciary duty for all the plaintiffs.

[00:06:06] Speaker 01:
Assume for the moment in answering the first question of our focus order that the scope of the fiduciary duty to the extent it existed does not support your claim for the plaintiffs other than the Worthingtons.

[00:06:19] Speaker 01:
Just assume that.

[00:06:20] Speaker 01:
I understand your argument is that it does.

[00:06:24] Speaker 01:
But if you assume that, then is there another source of a greater fiduciary duty with respect to the Worthingtons?

[00:06:33] Speaker 01:
And if so, what?

[00:06:35] Speaker 04:
So it's complicated because the scope of the fiduciary duty has to be determined with respect to the actual transaction that's being made.

[00:06:45] Speaker 04:
I want to point to, and I understand the, and I'm not going to try to dodge it, but I want to point to one of the, another quote from Duffy, which I think is critical for this case, and it comes just a little bit after the one that I quoted.

[00:06:59] Speaker 04:
Page 1531 the trial court is entitled to look at the substance and not the form of the transaction in determining the duty Just to be clear like so are you?

[00:07:12] Speaker 03:
Your argument is that we should be thinking about the Worthingtons and and anyone else We should think about the specific transaction that is at issue.

[00:07:23] Speaker 03:
So the fact we should be thinking about that this was a a

[00:07:27] Speaker 03:
proposal to enter into an advisory relationship by their broker and that that should be the focus of our consideration of what duty is owed and that the fact that they have already had in the background this advisory relationship is not relevant in determining what the duty is?

[00:07:44] Speaker 04:
I thought you were going somewhere else.

[00:07:46] Speaker 04:
I agree with the first part and disagree with the second part.

[00:07:49] Speaker 04:
I think that the specific transaction itself in this case

[00:07:54] Speaker 04:
is the recommendation to move from a brokerage account to a fee-based advisory account.

[00:07:59] Speaker 03:
And that was made at the time they had a, that relationship was a brokerage relationship, correct?

[00:08:05] Speaker 04:
That specific relationship was a brokerage relationship, but there is a question of fact about whether they were financial advisors under the circumstances.

[00:08:15] Speaker 04:
So that's the problem that I'm having.

[00:08:17] Speaker 02:
Well, where is there any case that says that the brokerage account

[00:08:23] Speaker 02:
has duties beyond the brokerage account duties.

[00:08:26] Speaker 04:
Yeah.

[00:08:26] Speaker 04:
So that's the point that I'm trying to make is I can be.

[00:08:29] Speaker 04:
So this is what Edward Jones says.

[00:08:31] Speaker 04:
They say, look, if I take my brokerage account hat off and put on my financial advisor account, I'm a financial advisor.

[00:08:37] Speaker 04:
But as long as I keep this brokerage account hat on, then I stay a broker.

[00:08:42] Speaker 04:
That's not what California law says.

[00:08:44] Speaker 02:
So where do we have a California law case that says that when you're recommending a particular type of account, you have

[00:08:53] Speaker 02:
Not just no fraud, not just disclose the facts, but actually you can only recommend the best kind of account.

[00:09:01] Speaker 02:
What case says that?

[00:09:02] Speaker 02:
Because I think that's what you want.

[00:09:03] Speaker 04:
Duffy and Twomey and Hasso v. Hapke, they all say that.

[00:09:07] Speaker 04:
Now, are the facts the same as the one that you just said?

[00:09:10] Speaker 04:
No, but what they say is the fiduciary duty is to act in the utmost good faith and integrity.

[00:09:16] Speaker 04:
And then the question is, how do you apply that under the circumstances?

[00:09:20] Speaker 03:
So utmost good faith and integrity is different from a best interest standard necessarily, though, right?

[00:09:26] Speaker 03:
I mean, I think that's the point we were talking about, that there's a lot of variation.

[00:09:29] Speaker 03:
And here, it seems like we have to identify

[00:09:33] Speaker 03:
some source of a best interest duty, correct?

[00:09:37] Speaker 03:
Well, I wonder whether that's true.

[00:09:40] Speaker 02:
Well, I think your expert only testified about this not being in the best interest.

[00:09:44] Speaker 02:
So if we don't have a duty that lines up with what the expert opined on, I think the expert becomes irrelevant and you have no facts.

[00:09:53] Speaker 02:
So you need the duty you're pointing to in the law to line up with what the expert was talking about.

[00:09:58] Speaker 04:
Right.

[00:09:59] Speaker 04:
So the duty is to act

[00:10:01] Speaker 04:
with integrity and the utmost good faith.

[00:10:03] Speaker 04:
And what does that mean to you?

[00:10:04] Speaker 02:
Okay, so if that's the only duty, then I don't know that your expert even talked about that, because instead he talked about this wasn't the best kind of account.

[00:10:09] Speaker 04:
Right.

[00:10:11] Speaker 04:
How hard is it to translate from that to a question about whose best, whose interest is this transaction in?

[00:10:17] Speaker 04:
It's the same inquiry.

[00:10:19] Speaker 04:
If I can point you to footnote eight of Duffy.

[00:10:21] Speaker 01:
Well, couldn't it be in the client's interest and Edward Jones' interest at the same time?

[00:10:26] Speaker 01:
Are you saying, I mean,

[00:10:28] Speaker 01:
So you're saying because it benefited Edward Jones, it could not have benefited the claims?

[00:10:33] Speaker 04:
No, I'm not saying that.

[00:10:35] Speaker 04:
What I'm saying is under the very specific circumstances that these plaintiffs fit into, it did not benefit them.

[00:10:44] Speaker 04:
Before I get there, this is the Douglas Schultz thing that I think I cannot walk away from court today without going into this.

[00:10:50] Speaker 04:
But I want to point the court, Judge Friedland, to answer your question.

[00:10:53] Speaker 04:
If you look at footnote eight of the Duffy case, there's a discussion there about Twomey.

[00:10:58] Speaker 04:
And the point of footnote eight is to say, what are the contours of the fiduciary duty for this specific person who's making a recommendation in this case?

[00:11:08] Speaker 04:
It says the broker must assume the responsibility for ascertaining that the customer understood the investment risks involved in her changed objective.

[00:11:19] Speaker 04:
So here's the duty in our case.

[00:11:23] Speaker 04:
Edward Jones must assume the responsibility for ascertaining that the custom understands the investment costs involved in the changed objective.

[00:11:31] Speaker 04:
That's the duty in this case.

[00:11:35] Speaker 03:
I mean, there's a question here.

[00:11:37] Speaker 03:
As I recall, there's some factual dispute about what people did or did not know.

[00:11:40] Speaker 03:
But the claim is not that – the core claim, at least as I understand it, is not that they were – they lacked information about these accounts.

[00:11:50] Speaker 03:
The core claim is, regardless of what information they were or were not provided, that it was not in their best interest, right?

[00:11:56] Speaker 03:
So we're not talking about

[00:11:58] Speaker 04:
informational injury we're talking about a claim that they could have said everything in the world about it and that they were nonetheless violating their duty by recommending these accounts with this point five percent more than point five percent differential in the costs right well it's it's actually a two-pronged sort of argument in the first part is why are you bothering to even provide this option to these clients when you know based upon the facts in the case that it's not in their best interest and then the second prong of it is you there was a duty to assure

[00:12:28] Speaker 04:
that the clients understood that – there's no dispute that they disclosed the amount of the fee, but what they didn't do is explain – they didn't do the math.

[00:12:39] Speaker 03:
They didn't explain – There's an interesting problem here because even – you haven't moved forward with one of your named plaintiffs in this case, correct?

[00:12:50] Speaker 03:
Because it turns out when you did the math as to that named plaintiffs' accounts, it was below the point – your expert's 0.5% threshold, correct?

[00:12:57] Speaker 03:
So in advance, would it even have been possible for these investment advisors, brokers, sorry, they're wearing their different hats, to run the math to determine that, oh, this person is going to end up with the cost structure that exceeds plaintiff's subsequent 0.5% standard?

[00:13:18] Speaker 04:
Yes, it would have been.

[00:13:19] Speaker 04:
And that's why you have to look carefully at the Douglas Schultz reports that are in the record.

[00:13:24] Speaker 04:
There are three things in particular you need to look at.

[00:13:27] Speaker 04:
He did a report, he did a declaration, and he did a rebuttal report.

[00:13:31] Speaker 04:
The Douglas Schultz opinion is so grossly mischaracterized by both the district court and Edward Jones, I have to just explain very briefly what he's saying.

[00:13:42] Speaker 04:
He says, if you have people who are small investors, $200,000 or less,

[00:13:49] Speaker 04:
and they are already in mutual funds, which means that they're already, you know, in the suitable investments, and you ask them to move to an asset, like an advisory fee-based account, then if there is a certain amount of additional costs that they're going to incur, and the services that they get provided are not worth those costs,

[00:14:17] Speaker 04:
That is presumptively unreasonable.

[00:14:20] Speaker 04:
That's what the Schulz opinion says.

[00:14:22] Speaker 04:
And it's based on legal advisory reports that came out from NASD, which is the precursor to FINRA.

[00:14:31] Speaker 04:
And it's based upon the Oliver Wyman study from 2010 that was a study commissioned by the SEC.

[00:14:38] Speaker 04:
It's analogous to the kind of looper metric that was developed to talk about churning.

[00:14:45] Speaker 04:
Okay.

[00:14:46] Speaker 04:
All of this is outlined in his expert report.

[00:14:49] Speaker 04:
Now, you wouldn't know any of that because it doesn't appear in the district court's ruling.

[00:14:54] Speaker 02:
But what does the Schultz... I think if you want time for rebuttal, I need to cut you off.

[00:14:58] Speaker 02:
We have the report and we can look at what you're talking about.

[00:15:01] Speaker 02:
Thank you, Your Honor.

[00:15:10] Speaker 00:
Good morning, your honors.

[00:15:11] Speaker 00:
May it please the court?

[00:15:12] Speaker 00:
My name is Monica Lipson with Gibson Dunn and Crutcher on behalf of defendant appellee Edward Jones.

[00:15:17] Speaker 00:
Let me focus my argument on the three questions that the court posed just a couple of weeks ago as a roadmap.

[00:15:24] Speaker 00:
First, when the Worthingtons opened their joint advisory account, so that guided solutions account,

[00:15:30] Speaker 00:
Did the fact that they had separate advisory accounts with Edward Jones cause Edward Jones to owe a greater fiduciary duty to them at that time with respect to that guided solutions conversation?

[00:15:41] Speaker 00:
The answer to that question is no.

[00:15:44] Speaker 00:
There's no reason here that the Worthingtons were owed a greater duty under the circumstances.

[00:15:49] Speaker 00:
The mere existence of those separate advisory accounts

[00:15:52] Speaker 00:
in which separate funds were managed by Edward Jones that are not the subject of this dispute, that near fact does not trigger a greater duty with respect to the funds and the investments in the brokerage account.

[00:16:04] Speaker 01:
But let's suppose... What authority do you have for that?

[00:16:07] Speaker 01:
Would you agree that at least with respect to serving as an investment advisor, there is a fiduciary duty?

[00:16:15] Speaker 01:
with respect to those accounts?

[00:16:17] Speaker 00:
Absolutely, with respect to those accounts.

[00:16:18] Speaker 01:
And what is that duty?

[00:16:20] Speaker 00:
And the source of that fiduciary duty for the advisory accounts, that source is the Investment Advisors Act.

[00:16:25] Speaker 00:
So Edward Jones has an obligation to provide advisory services and a fiduciary obligation with respect to those accounts that are managed in those advisories.

[00:16:35] Speaker 01:
And what is the nature of that fiduciary duty?

[00:16:37] Speaker 00:
The nature of that fiduciary duty certainly includes to act in the client's best interest, but it includes ongoing duties, right?

[00:16:44] Speaker 00:
The scope of the fiduciary duty with respect to those advisory accounts include those ongoing obligations to manage those funds, but also to act in the client's best interest.

[00:16:55] Speaker 00:
So that is the scope of the duty that Edward Jones owed the Worthingtons with respect to the investments they held in those advisory accounts.

[00:17:02] Speaker 00:
The question is, what duty did Edward Jones and Lisa Rodriguez owed the Worthingtons with respect to the different brokerage account?

[00:17:11] Speaker 00:
Now, that question depends on California state law.

[00:17:14] Speaker 00:
That's where Duffy and Toomey apply and come into question.

[00:17:18] Speaker 00:
The analysis requires the court to consider the facts or circumstances relevant to those funds and the extent of control

[00:17:26] Speaker 00:
that Edward Jones or Ms.

[00:17:28] Speaker 00:
Rodriguez exercised over those funds invested in the account.

[00:17:32] Speaker 01:
I understand.

[00:17:34] Speaker 01:
What I have trouble with, and I'm looking at the SEC guidance, it says once a professional, once a financial professional assumes the role of investment advisor, the advisor takes on fiduciary duty that applies to all investment advice.

[00:17:47] Speaker 01:
The investment advisor provides the clients, including advice about account type, account

[00:17:54] Speaker 01:
Advice about account type includes advice about whether to open or invest through a certain type of account.

[00:18:00] Speaker 01:
Why wouldn't that then apply to the Worthingtons?

[00:18:05] Speaker 01:
And they said, I think you should switch your brokerage account to a different type of account with higher fees.

[00:18:12] Speaker 00:
So first, that guidance that came out from the SEC, that was in 2019.

[00:18:16] Speaker 00:
Right.

[00:18:17] Speaker 01:
They said they were affirming prior guidance.

[00:18:20] Speaker 00:
Prior to that point in time, no case, no federal court case, no SEC case had applied the duties an advisor owes under the Investment Advisor Act more broadly beyond the scope of funds that were managed within an advisory relationship.

[00:18:34] Speaker 00:
So the Belmont case, for example, and the other cases applying Belmont have never applied it more broadly.

[00:18:41] Speaker 00:
So to the extent that was the SEC's changed or new view,

[00:18:45] Speaker 00:
As of 2019, I suppose that's their view to have.

[00:18:48] Speaker 00:
But it doesn't mean it should retroactively apply three years prior to 2016.

[00:18:53] Speaker 03:
I mean, they say it's reflecting existing law and reaffirming existing law.

[00:18:59] Speaker 03:
And certainly, I mean, I think you've cited a sort of statement by the SEC as well in the Federal Register, not an actual policy, but just a statement responding to certain comments in support of your claim that there are distinct

[00:19:13] Speaker 03:
interests that there are distinct duties that apply based on the account type that issue correct?

[00:19:19] Speaker 00:
That is correct.

[00:19:20] Speaker 00:
The SEC is saying we are providing guidance.

[00:19:22] Speaker 00:
This is our view of the law.

[00:19:24] Speaker 00:
But my point is simply that it has certainly never been applied that way by the SEC or any court of law.

[00:19:30] Speaker 03:
How is an individual investor supposed to understand when they go in to talk to their financial advisor that

[00:19:41] Speaker 03:
In fact, this part of our conversation today is subject only to the, you know, whatever California law, California duty might apply to brokers or federal might apply to brokers.

[00:19:53] Speaker 03:
And that's different from the judiciary duty that the same person owes me, you know, 20 minutes ago when we're talking about the kinds of investments that we're going to make in the funds that are in my financial advice.

[00:20:04] Speaker 00:
Sure.

[00:20:04] Speaker 00:
Well, let's take the Worthingtons, for example, the undisputed facts that at the time of that guided solutions conversation, the Worthingtons had three accounts with Edward Jones.

[00:20:13] Speaker 00:
They had the two retirement advisory accounts.

[00:20:16] Speaker 00:
They also had a sizable brokerage account.

[00:20:19] Speaker 00:
They chose to open it as a brokerage account because they liked picking their investments on their own.

[00:20:25] Speaker 00:
They liked picking which stocks they would choose to invest those brokerage funds in.

[00:20:30] Speaker 00:
So respectfully, the undisputed facts, I believe, show that the Worthingtons, at least, appreciated the difference, that they were not relying on Ms.

[00:20:38] Speaker 00:
Rodriguez's or Edward Jones' advice in deciding how to invest those particular funds.

[00:20:43] Speaker 01:
That's not quite answering the question, though, right?

[00:20:46] Speaker 01:
Because they're meeting with Ms.

[00:20:47] Speaker 01:
Rodriguez.

[00:20:47] Speaker 01:
At that point, she has at least taken on the role of an investment advisor, a financial advisor.

[00:20:55] Speaker 01:
So if they're meeting with her and does she literally say right now I'm advising you with my fiduciary duty as an official advisor, but when I tell you to switch your brokerage account to a guided solutions account, I'm no longer wearing that hat and I no longer have a duty to act in your best interest?

[00:21:15] Speaker 00:
Yeah, I agree that the record certainly doesn't suggest the conversation was parsed that finely, nor did it need to.

[00:21:20] Speaker 01:
So how, from the customer's perspective, are they supposed to know?

[00:21:25] Speaker 01:
If I do share a duty, it's not the same in when she's providing that advice.

[00:21:31] Speaker 00:
Because they have elected to have different relationships with respect to how their different funds are managed.

[00:21:37] Speaker 00:
That is a choice that the Worlingtons have made.

[00:21:39] Speaker 00:
They have decided not to pay, for example, advisory fees with respect to their sizeable brokerage account because they want to control the investments.

[00:21:48] Speaker 00:
They want to continue controlling those investment choices with respect to those funds.

[00:21:53] Speaker 00:
a different world would

[00:21:57] Speaker 00:
would come to an absurd result where a client could decide to open a very, very small advisory account and pay a very, very small advisory fee and receive advisory services with respect to that account, but somehow establish an expectation that they were entitled to without paying a broader advisory relationship to other funds held in the brokerage account.

[00:22:21] Speaker 00:
But on the facts of this case,

[00:22:24] Speaker 00:
It doesn't matter.

[00:22:26] Speaker 00:
There is no dispute that Ms.

[00:22:28] Speaker 00:
Rodriguez and Edward Jones met either standard.

[00:22:31] Speaker 00:
So whether with respect to the Worthingtons, they were owed a greater fiduciary duty with respect to that guided solutions conversation, there is no dispute, no genuine dispute of fact.

[00:22:43] Speaker 00:
that Ms.

[00:22:43] Speaker 00:
Rodriguez met that standard.

[00:22:45] Speaker 03:
I mean, that goes to the core.

[00:22:47] Speaker 03:
I mean, to get to that point, the district court had to conclude that the expert declaration and evidence that had been provided was not admissible or not probative of the issue.

[00:22:59] Speaker 03:
And I was planning to ask you, I mean, your colleague has articulated the way that I read the expert's report, which is that

[00:23:08] Speaker 03:
I think the district court said it was disregarding the law that you can't focus on cost alone and you have to consider other factors.

[00:23:15] Speaker 03:
It strikes me when reading the report that that's precisely what the expert did.

[00:23:20] Speaker 03:
The expert said there are a particular set of facts here that I'm considering the fact, the kind of investments they have, which are mutual funds, index funds, their particular goals as investors.

[00:23:35] Speaker 03:
So that in the particular context in which these individuals were investing in the particular kinds of accounts they had, it was the fact that, and he went through the other factors that might have justified a difference, it might have justified an increased cost.

[00:23:50] Speaker 03:
He went through all of the purported benefits of the financial advisor's account as opposed to a brokerage account, and he ultimately concluded

[00:23:56] Speaker 03:
that none of those were warranted.

[00:23:58] Speaker 03:
So the language saying that the increase in costs above a certain level is sufficient to show this, regardless of other factors, he's really saying, I've thought about all the other factors and they're not relevant, and that's my expert testimony.

[00:24:11] Speaker 03:
And so why is that not sufficient to create a factual dispute as to the existence of a breach of whatever obligation was owed?

[00:24:20] Speaker 00:
It is not sufficient to create a factual dispute because it is not a factual dispute.

[00:24:26] Speaker 00:
So all of the facts that he addresses in his report, those are not in dispute.

[00:24:30] Speaker 00:
There's no dispute that Ms.

[00:24:32] Speaker 00:
Rodriguez considered the financial circumstances of the Worthingtons

[00:24:36] Speaker 00:
she considered their risk profile.

[00:24:38] Speaker 03:
Well what about his testimony as an expert in the financial industry that recommending an account type that will increase costs above 0.5 percent under the circumstances, considering all the other potential benefits which are not ultimately illusory in his view, is that that constitutes a breach of the fiduciary duty.

[00:25:00] Speaker 03:
I mean that's his testimony, he's an expert who knows

[00:25:02] Speaker 03:
You know, we do allow expert testimony on the nature of particular duties as applied in particular industries.

[00:25:09] Speaker 03:
So why is that not sufficient to create a factual dispute on that issue?

[00:25:12] Speaker 00:
Because that's the equivalent of a conclusion of law.

[00:25:15] Speaker 00:
That's considering all of the undisputed facts and concluding that it breached the best interest standard.

[00:25:21] Speaker 02:
No court has ever... Well, no, I don't think he's saying that quite.

[00:25:25] Speaker 02:
I mean, isn't he saying, I'm an expert in the field, I understand how good advice is given, and this is bad advice?

[00:25:33] Speaker 00:
He, but at core, his opinion is it's bad advice because it's 0.5% more than the fees paid.

[00:25:41] Speaker 02:
Well, he, he has a benchmark for his bad advice, but he's basically saying, I'm an expert in the field and this is bad advice.

[00:25:48] Speaker 02:
So you don't like it, you don't agree.

[00:25:49] Speaker 02:
You think, I mean, I think you have great arguments about why it's bad, why it's not a very persuasive opinion.

[00:25:55] Speaker 02:
But persuasive is a question for the jury.

[00:25:58] Speaker 00:
But it's a matter of at what point that duty is breached, right?

[00:26:03] Speaker 00:
We have no dispute that diligence was done, additional services were provided, and that the cost is 0.5% more than what it was in the brokerage agreement.

[00:26:12] Speaker 00:
No federal law, not the SEC, not FINRA, no California law, no California case.

[00:26:18] Speaker 02:
has ever concluded that that is a per se breach, where the cost of advisory services... You're characterizing his opinion as a per se opinion because he had a rule of thumb, say.

[00:26:33] Speaker 02:
He's basically saying, I looked at these accounts and these fees and they're too high for it to be good advice.

[00:26:38] Speaker 02:
Yes, he also named a number and you're

[00:26:40] Speaker 02:
quibbling, calling it per se for that reason.

[00:26:42] Speaker 02:
But let's just assume for a second that he's really just saying these fees are too high for these types of people and it makes it bad advice.

[00:26:49] Speaker 02:
Why would that not create a fact dispute about whether it's bad advice?

[00:26:53] Speaker 00:
Because it's not just a rule of thumb as applied, Your Honor.

[00:26:56] Speaker 00:
It was a bright line rule.

[00:26:57] Speaker 00:
It was a per se breach of the duty, whether it's a best interest duty or the duty under Duffy or Toomey.

[00:27:03] Speaker 00:
That was his opinion.

[00:27:04] Speaker 03:
Again, arguably, he may think that you certainly could make an argument that it's below that.

[00:27:11] Speaker 03:
And he's effectively being conservative in his numbers.

[00:27:14] Speaker 03:
I mean, if he were to testify under a different set of facts, an expert said,

[00:27:20] Speaker 03:
I'm going to say that I look at all these accounts and this is categorically not in the best interest of the clients because the recommendation was to use an account type that will have fees so high that the principal will be entirely destroyed within 10 years of the account's existence.

[00:27:41] Speaker 03:
That would be a per se rule, but I would think that would be, you know, an expert could testify that to establish a breach of the duty.

[00:27:50] Speaker 03:
the fiduciary duty, couldn't they?

[00:27:51] Speaker 03:
I mean, there's nothing wrong about that as an expert opinion.

[00:27:57] Speaker 03:
You might disagree, but you could certainly see cases, maybe 0.5 percent is the wrong place to draw that line, but experts do have to draw lines, make decisions about the point at which they're going to do that, and that can be more conservative, that can be less conservative, but that, again, goes to the weight of their testimony rather than its persuasiveness or admissibility.

[00:28:20] Speaker 00:
but but to be clear it mr. Schultz proposes again a per se rule so not a rule of thumb where circumstances might cause a conclusion as to one investor to deviate from the conclusion as to every other investor although he proposes a per se he proposes a rule that is specific to the plaintiffs who are before him in this case and

[00:28:41] Speaker 03:
the particular circumstances that exist as to them, which involve the kinds of investments they're making, which are mutual fund and index funds investments, which are going to have their own cost structures, and presumably reflect their underlying investment strategies to a certain degree.

[00:29:00] Speaker 03:
He's not saying that this 0.5% rule would apply if you had a different set of plaintiffs whose only goal was growth and had no risk aversion whatsoever, who wanted to involve an individual high risk but high growth potential stock, something like that.

[00:29:18] Speaker 03:
We're talking about index fund, mutual fund investors in these particular contexts.

[00:29:23] Speaker 00:
No, I think he was proposing actually a bright line rule that... I mean, he only was testifying about the individuals who were before him, correct?

[00:29:31] Speaker 03:
And their accounts.

[00:29:32] Speaker 00:
Not quite.

[00:29:33] Speaker 00:
His expert report was also offered in support of their motion to certify a nationwide class using that same bright line rule.

[00:29:39] Speaker 00:
And that's the problem.

[00:29:41] Speaker 02:
That's where... But wouldn't the class have been of people with low volume accounts with this type of investment in them?

[00:29:48] Speaker 02:
I mean, it's not like for...

[00:29:50] Speaker 02:
very rich people.

[00:29:51] Speaker 03:
I mean, and that's, and again, what maybe you'd have an argument that you couldn't certify a class on the basis of this rule because there's too much variation within the class as to what their goals were and that it doesn't actually apply.

[00:30:02] Speaker 03:
But that's a separate question of to the extent he was testifying as to these individuals, you know, was it sufficient to create a dispute of material fact as to these individuals?

[00:30:13] Speaker 00:
Even as to these individuals, if you look at the nationwide case or the Worlds of Wonder case,

[00:30:18] Speaker 00:
What his opinion does is exactly what this court did not permit the experts there to do.

[00:30:23] Speaker 00:
And that was to look at the undisputed facts and conclude, for example, in the World's Wonder case, that in that expert's view, Deloitte exhibited a level of scienter that was sufficient under the law.

[00:30:35] Speaker 00:
That's what Schultz is doing here.

[00:30:37] Speaker 00:
He is looking at the undisputed facts.

[00:30:39] Speaker 02:
But he's not saying it's sufficient under the law.

[00:30:41] Speaker 02:
He's saying it makes it bad advice.

[00:30:44] Speaker 02:
So can I go back to an earlier question?

[00:30:47] Speaker 02:
Because I think in my view, you have a problem with this being a fact dispute if there really is a duty in this context to be in the client's best interest.

[00:31:00] Speaker 02:
But earlier on when we were talking about this 2019

[00:31:05] Speaker 02:
I don't know, clarification, restatement.

[00:31:08] Speaker 02:
Can you explain?

[00:31:10] Speaker 02:
I think there was a premise of the questions earlier that it was just reaffirming prior law.

[00:31:15] Speaker 02:
And I don't know that you... Do you agree that it was just reaffirming prior law?

[00:31:18] Speaker 00:
I do not believe it was reaffirming prior law because if you look at the investment advisor cases, including the cases where the claim was a state law claim for breach of fiduciary duty,

[00:31:28] Speaker 00:
And the source of that duty was the Investment Advisors Act.

[00:31:32] Speaker 00:
Even in those cases, that duty has never been applied outside the scope of the advisory relationship and the investments managed within that advisory relationship.

[00:31:41] Speaker 00:
That's why I don't think that is a correct statement of the law at the relevant time in 2016.

[00:31:46] Speaker 02:
I was having iPad trouble today.

[00:31:47] Speaker 02:
So did the 2019 statement, though, say that it was reaffirming prior law?

[00:31:52] Speaker 00:
What did it say it was doing?

[00:31:53] Speaker 00:
I don't think it was that precise.

[00:31:56] Speaker 00:
It certainly did not appear on its face to engage in a historical analysis of the application of the federal fiduciary standard in the past.

[00:32:05] Speaker 00:
It was a passing statement about advice related to account type, right?

[00:32:11] Speaker 00:
Account type advice.

[00:32:12] Speaker 00:
So to the extent that was the view, it was news to the industry, and it was new as of 2019.

[00:32:17] Speaker 02:
And can you point to anything that helps us as not experts in this industry understand that?

[00:32:22] Speaker 02:
Like, what do we look at to see whether this was new or not?

[00:32:25] Speaker 00:
Yeah, I think the best place to look is the very fact that that very year, the SEC adopted regulation best interest, so Reg BI.

[00:32:34] Speaker 00:
That rule expressly applies to this circumstance.

[00:32:38] Speaker 00:
It applies to the circumstance where a broker has an existing brokerage relationship with a client and is recommending an account type.

[00:32:46] Speaker 00:
So let's assume a recommendation.

[00:32:47] Speaker 00:
And does that say, like, this is new now?

[00:32:49] Speaker 00:
I mean, where do we learn that this is new?

[00:32:51] Speaker 00:
It's in regBI.

[00:32:52] Speaker 00:
It's in regulation best interest.

[00:32:54] Speaker 00:
Does it say it's new?

[00:32:55] Speaker 00:
Yes.

[00:32:56] Speaker 00:
And it was very...

[00:32:57] Speaker 00:
Reg BI was a monumental undertaking for the industry.

[00:33:01] Speaker 00:
It was the first time that the best interest standard was adopted for broker dealers.

[00:33:06] Speaker 00:
It was after public release and extensive public comment.

[00:33:10] Speaker 00:
In fact, it was adopted in 2019, and the effective date had to be delayed until 2020.

[00:33:15] Speaker 00:
So there's no question.

[00:33:17] Speaker 00:
The best interest standard is the correct standard and would apply to the Worthingtons today.

[00:33:22] Speaker 00:
But the issue is it doesn't apply back to 2016.

[00:33:24] Speaker 03:
Well, and it is the case, is it not,

[00:33:27] Speaker 03:
And I think this is one of the things you've quoted, that in adopting the best interest standard, they did apply the best interest standard.

[00:33:35] Speaker 03:
There was a choice not to apply a full version of the fiduciary duty standard that applies under the Investment Advisors Act, correct?

[00:33:43] Speaker 03:
That is correct.

[00:33:44] Speaker 03:
They decided to make some aspects of it

[00:33:48] Speaker 03:
were adopted, but they did not just make the obligations of brokers identical to those of investment advice.

[00:33:55] Speaker 00:
That is correct.

[00:33:55] Speaker 00:
It is still different.

[00:33:56] Speaker 00:
But with respect to the duty that plaintiffs argue applies here, that is reg BI, and it did not become effective until 2020.

[00:34:03] Speaker 02:
Any other questions?

[00:34:10] Speaker 02:
OK.

[00:34:11] Speaker 02:
Thank you for your argument.

[00:34:12] Speaker 02:
Let's put three minutes on the clock for rebuttal.

[00:34:18] Speaker 04:
Thank you, Your Honors.

[00:34:20] Speaker 04:
I don't want to address the Schultz opinion.

[00:34:24] Speaker 04:
I think you have a good grip on that unless you have questions about it.

[00:34:27] Speaker 02:
Can you point to anything that tells us that this version of best interest that definitely does exist from 2019 on, point to something specific that says it existed prior to that for a choice of accounts, advice?

[00:34:42] Speaker 04:
I don't disagree with opposing counsel that there is something new going on here.

[00:34:50] Speaker 04:
I think the court needs to put it in context and forget about the fact that it's federal because we're operating under California law.

[00:34:58] Speaker 04:
But the context is that the SEC has for years been trying to figure out what is the appropriate relationship, what is the appropriate duty

[00:35:06] Speaker 04:
um... even though they now are saying you have to operate in best interest they still won't call it a fiduciary duty so there's a lot of work that goes on earlier today you really weren't talking about the any of this federal law you really just coming in and saying look at california well because here's why because we're in california

[00:35:24] Speaker 04:
And California says you have a fiduciary duty.

[00:35:27] Speaker 04:
So whether or not they have a fiduciary duty under federal law is irrelevant.

[00:35:31] Speaker 04:
We do have a fiduciary duty.

[00:35:33] Speaker 04:
The only question is, what are the contours of that duty?

[00:35:35] Speaker 04:
That's why we're looking at the federal law.

[00:35:37] Speaker 02:
And so what tells us that the contours of the duty in California prior to 2019 were what they are after 2019 in federal law?

[00:35:44] Speaker 04:
Well, my question is, why do we have to rely on whether this is retroactive or not?

[00:35:50] Speaker 04:
a duty was available for the SEC to adopt and to propose for many, many years.

[00:35:56] Speaker 04:
They finally got around to doing it after the industry went hog wild moving their brokerage clients over to advisory fee-based accounts.

[00:36:05] Speaker 04:
But why are we restricted from looking at what California law would consider a fiduciary duty under the circumstances?

[00:36:13] Speaker 01:
And I also want to point out if you look at... I just want to be very clear.

[00:36:17] Speaker 01:
Are you conceding that as of

[00:36:20] Speaker 01:
2016, someone who had clients who had both an investment advisor account and a brokerage account.

[00:36:30] Speaker 01:
The investment advisor did not have a duty to act under federal law, a duty to advise the client in their best interest as to account type choice.

[00:36:41] Speaker 04:
best interest did not come into effect until 2019.

[00:36:44] Speaker 01:
So that 2019 guidance that I just read from the SEC, you concede was new as of 2019?

[00:36:50] Speaker 04:
Yes.

[00:36:51] Speaker 01:
Okay, so you're relying solely on state law for the... Incorrect.

[00:36:56] Speaker 04:
What I'm relying on is the fact that state law says there has to be... So think about this.

[00:37:02] Speaker 04:
Do we have any California cases that address these specific circumstances?

[00:37:06] Speaker 04:
No.

[00:37:06] Speaker 04:
But do we know that California law imposes a fiduciary duty?

[00:37:09] Speaker 04:
Yes.

[00:37:10] Speaker 04:
So how do we fill that in?

[00:37:11] Speaker 04:
How do we figure it out?

[00:37:12] Speaker 04:
We have to look at the federal law.

[00:37:14] Speaker 04:
We have to look at other circumstances.

[00:37:16] Speaker 04:
We have to analogize to other kinds of cases.

[00:37:19] Speaker 04:
That's why I quoted Duffy, because Duffy in footnote eight tells us

[00:37:23] Speaker 04:
that your duty is to ascertain whether the client truly understands what the risks are.

[00:37:28] Speaker 04:
In our case, it's not a risk that we're talking about, it's advice.

[00:37:32] Speaker 04:
So Duffy says you have to truly ascertain whether or not the client understands what the costs are, okay?

[00:37:38] Speaker 04:
So in 2019, the SEC got around to recognizing, you know.

[00:37:41] Speaker 02:
You're over your time.

[00:37:42] Speaker 02:
So unless my colleagues here want more, I think I'm going to cut you off.

[00:37:46] Speaker 02:
Do you want more answer?

[00:37:48] Speaker 02:
OK.

[00:37:48] Speaker 02:
Sorry, you're over your time.

[00:37:49] Speaker 02:
Thank you.

[00:37:50] Speaker 02:
Thank you both sides for the helpful arguments.

[00:37:52] Speaker 02:
This case is submitted.