State securities regulator says states can enforce DOL fiduciary rule

A prominent state securities regulator backed Massachusetts’ effort to enforce the Labor Department’s fiduciary rule and said he would do the same thing under the right circumstances.

Industry participants, investor advocates and others were jolted Thursday when Massachusetts Secretary of the Commonwealth William Galvin charged Scottrade Inc. with violating state law and internal policies by conducting sales contests that failed to adhere to the impartial conduct standards of the DOL rule.

Those standards were implemented last June. The remainder of the regulation is delayed until July 2019 during a DOL review mandated by President Donald J. Trump that could lead to major changes. There was some question about whether the applicable parts of the rule would be enforced.

Mr. Galvin gave a resounding answer.

“Massachusetts was certainly within its parameters to say, ‘Hey, we’ve got a problem here,’” said Joseph Borg, director of the Alabama Securities Commission. “I see this as part of the normal scope of what states ought to be doing to protect their citizens and ensure that firms are following their own rules, let alone state rules.”

Mr. Borg, the president of the North American Securities Administrators Association, said that if other states see conflicts of interest between brokers and their clients related to the DOL rule, they’ll follow in Massachusetts’ footsteps.

“If that requires taking an action, most states will take an action,” he said.

Although he is not auditing Alabama firms for DOL-rule compliance, Mr. Borg said that if a concern was brought to his attention by an investor or a broker, he would “take the appropriate and measured action to remedy the problem.”

Joshua Lichtenstein, a partner at Ropes & Gray, said that New York, Connecticut and California are among the states most likely to bring DOL-related cases.

“These are the states where the regulators have the broadest authority because of the volume of financial institutions in the state,” Mr. Lichtenstein said.

States are likely to wait and see how the Massachusetts case unfolds, according to Kevin Walsh, an attorney with the Groom Law Group.

He said that a lot will ride on a judge’s decision over whether the case should be allowed to proceed. The twist is that Massachusetts is using the DOL rule to highlight how Scottrade is allegedly violating the state’s securities laws.

“It’s a novel claim,” Mr. Walsh said. “Should the claim get past the motion to dismiss, you could see other states bring similar claims.”

During its review of the rule, the agency said that it wouldn’t bring enforcement against firms that are making a good faith effort to comply with the implemented provisions.

One of the delayed parts of the regulation would allow investors to file class-action suits against brokers who violate the DOL regulation, which requires them to act in the best interest of clients in retirement accounts. With that provision in limbo, Massachusetts burst onto the scene.

“I’m not sure industry participants were expecting that,” said Brendan McGarry, an attorney at Kaufman Dolowich & Voluck. “It broadens the scope of potential enforcement implications of the rule itself.”

That puts pressure on firms that have written policies and developed procedures in response to the DOL rule’s impartial conduct standards. After Mr. Galvin’s action, they can’t ignore the possibility that someone will hold them to account.

“They either need to follow their policies or change their policies,” Mr. Lichtenstein said. “If they’re going to change their policies, they should have a rationale for why that decision is appropriate in light of obligations under the fiduciary rule.”

Related Topics: North American Securities Administrators Association Inc (NASAA)