The Secretary of the Commonwealth of Massachusetts, William Galvin, has filed a complaint against Arizona-based discount brokerage Scottrade, citing a violation against the Department of Labor’s (DoL) fiduciary standard rule.
Scottrade, the complaint alleges, knowingly violated its own internal policies that were put in place to ensure compliance with the rule by instigating a number of internal contests based on the sale of retirement accounts.
The move comes amidst a period of uncertainty regarding the rule, the enforcement of large parts of which have been delayed until July 2019. The Securities and Exchange Commission (SEC) has also made it clear that it is exploring its own version of the rule that could supersede that of the DoL.
State v DoL
While the complaint heavily referenced the fiduciary rule itself, the regulator filed its complaint based on the fact that Scottrade violated section 204 of the Massachusetts Uniform Securities Act – which protects the public interest of the state’s investors. Speaking with IFLR, Galvin outlined that as well as ignoring its own policies that were in place to ensure compliance by running sales competitions, Scottrade ignored the fiduciary rule and violated state law.
“Obviously the rule provides that you have to put the customer or the client first, and not have a hidden contest or any kind of benefit to the agent who is trying to sell things within the retirement portfolio,” he said. “We allege that after the rule went into effect, this was exactly what Scottrade did.”
KEY TAKEAWAYS
The Secretary of the Commonwealth of Massachusetts has filed a complaint against discount brokerage Scottrade, citing a violation against the DoL’s fiduciary standard rule;
The regulator filed its complaint based on the fact that Scottrade allegedly violated section 204 of the Massachusetts Uniform Securities Act which protects the public interest of the state’s investors;
The discount trader had offered a number of internal target based competitions, which the regulator claims were in direct violation of its internal compliance with the much debated rule;
It is uncertain if the complaint will set a precedent, although chief regulator William Galvin asserts that that is not the intention – they are simply enforcing the rules designed to give protect retirement investors.
Although the fiduciary rule is in effect, Labor Secretary Alexander Acosta confirmed in May that the DoL will limit enforcement on a temporary basis.
“We will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the fiduciary duty rule and the related exemptions, or treat those fiduciaries as being in violation of the fiduciary duty rule and exemptions,” he said at the time.
The complaint argued that the aggressive sales practice of Scottrade, at the time in the process of a sale to TD Ameritrade, did not in fact work diligently to put the interests of its customers ahead of its own – ‘a clear demonstration that Scottrade has failed to act in good faith to comply with the Fiduciary Rule’.
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"If we have a rule, we take it seriously and we intend to make sure it is enforced" |
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“If we have a rule, we take it seriously and we intend to make sure it is enforced,” said Galvin. “We think the rule has already proven its value, and we don’t want to see it weakened.”
Precedent setting?
The complaint filed by the securities division may mark the start of a new chapter in the saga of the DoL’s fiduciary rule, said Ropes & Gray partner Josh Lichtenstein.
“There are a number of questions that will need to be resolved following the filing of this action, but the securities division’s action reinforces the importance of ensuring that compliance policies adopted in connection with the fiduciary rule are actually followed by institutions and their financial advisors,” he said. “The filing also serves as a reminder that institutions should review their procedures to ensure that they are appropriate for complying with the rule as it stands during the current transition period.”
It remains to be seen if the filing will set a precedent that will see other states follow suit with similar claims of their own. Last September a number of states including New York, New Jersey, Connecticut and Massachusetts, passed bills requiring retirement advisers to expand their individual fiduciary requirements in lieu of the federal level protection.
According to Galvin, when initiating this complaint setting an example is not the intention – pointing out that the regulator has always taken a strong position when it comes to protecting its investors.
“I am not looking to set a precedent but I am looking to enforce the rule,” he said. “The rule is designed to give retirement investors some level of protection and security that the people they are doing business with are only interested in them, and aren’t using them as pawns in some sort of prize contest.”
Unfortunately, the SEC and the Trump administration don’t have the same philosophy of strict enforcement that we do, he continued.
He added: “We are not bound by them. If we see a violation that effects our investors, our retirees, our retirement investors, then we are going to take action irrespective of the SEC or any others - we would be delighted if they did, but they didn’t.”
See also
SECs Clayton no silver bullet to solve fiduciary conundrum
