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The Labor Department’s fiduciary rule is largely on hold for at least another year, but some state regulators are stepping up to the plate to enforce it in the meantime.
Scottrade Inc. has the dubious distinction of being the first company to face any sort of legal challenge under the rule. It was the target of a first-of-its-kind administrative complaint by regulators in Massachusetts. They say the company, which was recently acquired by TD Ameritrade, ran nationwide sales contests in which employees competed to bring in new business and assets, including retirement plan assets. According to regulators, the contests violated the company’s internal policies drafted to comply with the DOL’s fiduciary rule.
By seeking to hold a specific company liable under state law for alleged fiduciary rule violations, Massachusetts has taken things a step further than other states have. Connecticut, Nevada, New Jersey, New York, and other states have passed laws or proposed regulations that mirror some of the federal rule’s requirements, but the action against Scottrade appears to be the first attempt by a state to enforce the rule in the DOL’s absence.
The fiduciary rule aims to rein in the financial advice given to retirement investors, which the Obama administration said was often conflicted and not in investors’ best interests. After President Donald Trump ordered the Labor Department to rethink the regulation in 2017, the DOL announced a temporary nonenforcement policy while it completes that review.
Should other companies be concerned about state enforcement actions under the fiduciary rule? Some in the industry say yes, especially if the companies are violating internal policies designed to comply with the rule. What’s more, several state securities regulators confirmed to Bloomberg Law that the issue is on their radar.
Bloomberg Law reached out to several state securities regulators for their thoughts on the Scottrade case. None confirmed any official investigation into the company, but a few said they were following the issue.
A spokeswoman for Colorado’s Division of Securities confirmed that state Securities Commissioner Gerald Rome is aware of the Scottrade case.
“Commissioner Rome agrees with the Massachusetts assessment that these actions by firms like Scottrade are subject to the DOL Fiduciary Rule, and may also fall under Colorado rules and regulations,” the spokeswoman told Bloomberg Law in an email. “However, due to statutory restrictions the Division cannot confirm or deny the presence of any ongoing investigations related to this issue.”
Tom Dresslar, a spokesman for the California Department of Business Oversight, said his state was looking into the Scottrade matter, too.
“Our laws and regulations that prohibit fraud, require just treatment of investors and require adequate supervision of agents could come into play depending on the factual circumstances,” Dresslar told Bloomberg Law in an email. “We definitely will scrutinize Scottrade’s conduct in California and take appropriate action based on what we find. Retirement insecurity is a major problem in this country. That increases the importance of protecting retirement accounts from broker-dealers who place their own interests above those of their investor clients.”
A spokeswoman for Florida’s Division of Securities said the state is aware of the Massachusetts action and is reviewing the matter. Regulators in Ohio confirmed they’re aware of the action but declined to comment further.
Oregon has no current plan to bring an enforcement action based on the allegations against Scottrade. A spokesman for Oregon’s Department of Consumer and Business Services told Bloomberg Law the state hasn’t received any consumer complaints involving the Scottrade allegations and therefore hasn’t reviewed the matter.
Despite state interest in this case, Alabama Securities Commission Director Joe Borg said it’s not likely that 25 different states will bring separate enforcement actions against Scottrade, even if the contests were nationwide.
“I’m not planning on doing the same thing Massachusetts did unless Scottrade continues its activities and it does so in my state,” Borg, who also serves as president of the North American Securities Administrators Association, told Bloomberg Law. “I can’t predict how extensive the problem is at Scottrade or anywhere else, but personally I’m satisfied with how Massachusetts is handling it. We want the firm to be fair with its clients, and we want the firm to follow its own policies.”
Borg added that the Massachusetts enforcement action against Scottrade shouldn’t come as a big surprise. Just because one regulator—the federal Labor Department—isn’t enforcing a law that’s validly on the books doesn’t mean other entities won’t step up to fill the void, he said.
“There’s a DOL rule, and there’s an internal policy by Scottrade saying they’re not supposed to do contests because of the DOL rule, and they’re violating their own policy,” Borg, who also serves as president of the North American Securities Administrators Association, said. “Whether it’s a DOL rule or not, it’s really immaterial. We start from the premise that there’s a rule on the books, and the fact that one agency has put off enforcement for awhile doesn’t mean we’re not going to look and see if there’s a violation that affects our citizens.”
To the extent a company has crafted internal policies designed to comply with the fiduciary rule, the company could be vulnerable to state enforcement actions if it violates those rules, Borg said.
“We go against firms for breach of their own rules all the time—it’s nothing new,” he added.
For both consumers and the financial industry, the Scottrade case is a serious development that could be a harbinger of things to come. The case provides more evidence that the DOL isn’t serious about enforcing the law, said Micah Hauptman, financial services counsel for the Consumer Federation of America in Washington.
“While Massachusetts can only enforce Massachusetts law violations within Massachusetts, other state securities regulators can and should step up and take action against Scottrade and other firms for violations within their jurisdictions,” Hauptman, whose organization supports the DOL fiduciary rule, told Bloomberg Law in an email. “That we now have to rely on state securities regulators to bring enforcement actions for violations of the rule underscores the importance of and need for an independent enforcement mechanism that allows individuals who have suffered harm to bring cases themselves.”
Fiduciary rule opponents also predict that the Massachusetts action could set off additional state enforcement activity. Eugene Scalia, the Gibson Dunn & Crutcher LLP attorney who’s challenging the fiduciary rule in court, said recently that the Massachusetts action could spark other state enforcement activities or lawsuits by private parties.
“The action also shows that the Fiduciary Rule is exacerbating the risk of litigation, even absent ‘Best Interest Contracts,’” Scalia wrote in a Feb. 16 letter to the U.S. Court of Appeals for the Fifth Circuit. “With such litigation being pursued by state officials, private plaintiffs can also be expected to exploit the Rule to concoct state-law claims. Far from the uniform, federal standard of liability that Congress intended, the Fiduciary Rule is now spawning claims that will be enforced ‘under the splintered laws of fifty States,’” he wrote, quoting a brief from the U.S. Chamber of Commerce.
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