A decision by Massachusetts’ regulators to file state charges against Scottrade by claiming it violated the Department of Labor fiduciary rule has surprised many industry analysts.
In a complaint filed Thursday, state regulators claim the discount brokerage engaged in improper sales practices. Scottrade “knowingly” tied sales contests to retirement accounts, regulators say in the 20-page court filing.
But all of the violations alleged by the Massachusetts Securities Division are of state law. In short, the state claims Scottrade ignored the policies and procedures it put in place starting June 9 to comply with the DOL rule.
By ignoring those policies, the state claims Scottrade violated state laws by conducting transactions in bad faith. Secretary of the Commonwealth William Galvin seeks a return of profits Scottrade earned from the alleged activities, and is seeking an undisclosed administrative fine.
The role the DOL rule played in the charges has analysts rethinking their advice. The Trump administration advised early in 2017 that it would not be pursuing enforcement of the fiduciary rule as long as companies were acting “in good faith” to comply.
But few could have foreseen a situation in which state regulators would seize on lax compliance with the federal regulation as an impetus for state charges, said Bruce L. Ashton, a lawyer with Drinker Biddle & Reath.
“So the state is asserting that Scottrade’s failure to follow its own policy constitutes a violation of Massachusetts state law,” he said. “They only quote one part of the policy, and there may be other aspects of the Scottrade written supervisory procedures that are relevant and show that the company is not failing to observe the standards. But that remains to be seen.”
‘Aggressive Sales Culture’
In court docs, state regulators described as “aggressive sales culture” that peaked with “call nights” and sales contests between December 2015 and April 2017 as Scottrade sought business ahead of its merger with TD Ameritrade.
In the meantime, the Trump administration relinquished its fight and allowed the first phase of the Obama-era fiduciary rule to take effect. Like other firms, Scottrade produced a set of policies and procedures designed to ensure compliance with the Impartial Conduct Standards that took effect June 9.
Those standards require advisors and agents to act in the client’s best interest, make no misleading statements and accept only “reasonable” compensation.
Scottrade was ready on paper to comply with the new rules, state regulators said in court docs. Reality was a different story.
“Despite its addition of policies related to the fiduciary rule, Scottrade expanded the scale and scope of the very sales practices its policies were designed to curtail,” the court filing reads.
Scottrade launched a pair of sales contests between June and September 2017, with the first campaign offering $285,000 in cash prizes, according to court documents.
“Both the Q3 and Q4 sales contests perversely incentivized Scottrade agents to bring in new assets from customers, including through the rollover of retirement assets,” according to court documents.
Still, the charges do not specifically say incentives were awarded for sales, Ashton noted.
“Were the contests and any accompanying rewards directed at effort rather than results?” he asked. “If directed at effort, this might not violate either the policy or the Impartial Conduct Standards.”
A Strong Precedent
The big news is the precedent set by the Scottrade charges. Other regulatory entities might now view DOL rule violations in the similar context.
The Massachusetts strategy reflects “emphasis by all securities regulators on individual investors, especially retirement investors,” said Brendan McGarry, an attorney at Kaufman Dolowich & Voluck in Chicago, who advises broker/dealers and advisors.
Scottrade’s reaction will be noteworthy, he added. Will the firm argue that state regulators are usurping the DOL? Or will they bypass a counter-argument and move straight to negotiations?
Meanwhile, the pro-fiduciary forces are pleased by the Massachusetts news, said Barbara Roper, director of investor protection for the Consumer Federation of America.
“We’ve always hoped that the states could play a role in enforcing the rule, but we didn’t know this was in the works,” she said. “It is very encouraging to see them step in and play this role, and hope this is just the beginning.”
The second part of the DOL rule deals with exemption classes to sell variable and fixed indexed annuities on a commission basis, among other things. It has been delayed until July 1, 2019.
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at email@example.com.
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