Galvin charges Scottrade with DOL fiduciary rule violations

Action of Massachusetts' top regulator shows states can put teeth into a rule under review by the Trump administration

Feb 15, 2018 @ 2:36 pm

By Mark Schoeff Jr.

Massachusetts charged Scottrade Inc. on Thursday with violating the Labor Department fiduciary rule, demonstrating that even as the regulation is being reviewed by the Trump administration it could still have bite.

In a complaint, the state alleged that Scottrade ran two sales contests between June and September 2017 despite the firm's own policy put in place to follow the DOL rule that includes a ban on such contests.

The DOL regulation, which requires brokers to act in the best interests of their clients in retirement accounts, was partially implemented on June 9, 2017. One of the provisions that became applicable requires brokers to follow impartial conduct standards when working with retirement clients.

The Massachusetts complaint asserts that the Scottrade sales contests encouraged their brokers to put their own interests — winning $285,000 in cash prizes for attaining new assets — ahead of their clients' interests in building their nest eggs. The complaint seeks an order forcing Scottrade to cease and desist, as well as censuring the firm, requiring it to disgorge ill-gotten profits and imposing a fine.

The state filed its enforcement case while the DOL is reassessing the remaining parts of the rule under a directive from President Donald J. Trump that could result in major changes. During the implementation delay until July 2019, the agency said it won't enforce the rule as long as firms try to comply in good faith.

Massachusetts Secretary of the Commonwealth William Galvin said in an interview that Scottrade's "extremely aggressive sales conduct" and "hypocrisy" toward its internal policy showed that it is not adhering to the DOL's regulation.

His move appears to be the first DOL-rule enforcement at the state level.

"It's pretty obvious from the conduct of the [Trump] administration that they don't like the rule," Mr. Galvin said. "When I see a violation, I don't wait for other regulators, especially when their disposition expresses a lack of interest in enforcing it."

A DOL spokesman declined to comment.

TD Ameritrade acquired Scottrade in September. The brokerage units of the firms will be run separately until they are unified in a few weeks.

A Scottrade spokeswoman referred an inquiry to a TD Ameritrade spokesman, who said the firm does not comment on litigation.

An advocate for the DOL fiduciary rule praised Mr. Galvin's action.

The case "perfectly illustrates the kind of practices that go on behind the scenes at firms that claim to be complying with a best-interest standard," said Barbara Roper, director of investor protection at the Consumer Federation of America. "This is why we need the DOL rule and why we need to have it enforced.

"Massachusetts has shown that it is prepared to enforce the standard," Ms. Roper said. "The ball is in the DOL's court to enforce their rule."

When the rule was partially implemented last summer, it was unclear who would enforce it with respect to individual retirement accounts. It appears that states can fill the role, according to Fred Reish, a partner at law firm Drinker Biddle & Reath.

"We now know the answer to at least part of that question," Mr. Reish said. "State securities regulators will be enforcing the impartial conduct standards. I wouldn't be surprised if the larger urban states follow Massachusetts."

The Bay State case serves as a warning to brokerages not to fall asleep on complying with the parts of the DOL rule that are in place, even as the Labor Department de-emphasizes enforcement during its review of the regulation, according to George Michael Gerstein, counsel at Stradley Ronon Stevens & Young.

"This is an example of the teeth to the DOL rule even during the transition period," Mr. Gerstein said. "Generally speaking, this suggests that the DOL rule can implicate state rules that could form the basis for state regulatory actions."

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