The Massachusetts Securities Division charged Scottrade on Thursday with violating the impartial conduct standards laid out in the Labor Department’s fiduciary rule, which took effect on June 9, 2017.
Commonwealth Secretary William Galvin, the state’s top securities regulator, charged the broker-dealer with “dishonest and unethical activity and failure to supervise” for conducting sales contests that violated Labor’s impartial conduct standards.
Despite Scottrade adopting a rule to adhere to the impartial conduct standards that prohibited sales quotas, appraisals, bonuses, contests and other incentives for retirement or prospective retirement account clients, the broker-dealer “held at least two sales contests which included retirement assets” after June 9, the complaint states.
The complaint states that prior to the impartial conduct standards becoming effective, “Scottrade employed a firmwide culture characterized by aggressive sales practices and incentive-based programs.”
For example, from December 2015 to April 2017, Scottrade conducted a “series of call nights and sales contests, in part to drum up additional business in light of an upcoming merger with TD Ameritrade,” the complaint states.
By conducting at least two sales contests after June 9, Scottrade failed to enforce the new standards it had put in place.
“The performance of agents who participated in the contests was tracked and appraised, and awards and incentives were given out in connection with retirement assets,” according to the complaint.
TD Ameritrade, which acquired Scottrade in September, says that it does not comment on pending regulatory or legal matters.
ERISA attorney Fred Reish, a partner at Drinker Biddle & Reath in Los Angeles, told ThinkAdvisor Thursday that while the Employee Retirement Income Security Act “has its own remedies, for example, claims for fiduciary breaches, it was not [made] clear how violations of the Impartial Conduct Standards involving IRAs would be enforced.”
While the IRS, Reish explained, “has authority to audit for violations of the rules governing IRAs, it does not have a history of looking at advisors to IRAs and, in any event, it has agreed to the non-enforcement policy during the [fiduciary rule's] transition period—until July 1, 2019.”
The Massachusetts action “brings some clarity to that question: State securities regulators may be using the Impartial Conduct Standards as a basis for claims.”
At issue in Massachusetts is “whether Scottrade violated Massachusetts’ rules and whether it violated its own policies,” Reish continued. “However, the complaint makes numerous references to the Impartial Conduct Standards and to possible incentives to advisors that may cause recommendations that are not in the best interest of IRA investors.”
Massachusetts’ action “will likely be followed closely by the securities regulators in other states,” Reish said.
He advised broker-dealers to “review their policies, procedures and practices, including supervision, around any compensation arrangements that could incent advisors to make recommendations that favor the advisors over the interests of investors.”
When “properly handled, sales contests can be designed and managed in a manner which complies” with Labor’s fiduciary rule.
Galvin has been a vocal supporter of Labor’s fiduciary rule. Massachusetts’ action looks to be the first action taken by a state regarding fiduciary rule compliance.
“Despite the efforts in Washington to kill the fiduciary rule, the impartial conduct provision remains in place,” Galvin said Thursday in announcing the complaint against Scottrade. “If the Department of Labor will not enforce its own laws and rules, then the states must do what they can to protect retirees from firms who believe they can play with peoples’ life savings by conducting sophomoric contests.”
The complaint against Scottrade seeks a cease and desist order, censure and an administrative fine.
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