Editor’s note: This interview first appeared in Human Capital, a newsletter by Washington Bureau Chief Melanie Waddell about the people who shape the financial regulatory space. Melanie writes:
“I just had to speak with Massachusetts Securities Regulator William Galvin this week about the action his office took last week against Scottrade for violating the Labor Department’s fiduciary rule – the first state action of its kind. There’s been some debate among ERISA attorneys about whether the Massachusetts action was indeed directly related to DOL rule infractions. Galvin’s take: It most certainly was.”
As Massachusetts secretary of state, William Galvin oversees the state’s securities division and is considered one of the most active state securities regulators when it comes to cracking down on financial wrongdoing (though he begs to differ). A graduate of Boston College, he received a Juris Doctor from Suffolk University Law School and has served a stint as the state’s acting governor.
In levying the action against Scottrade on Feb. 15, Galvin alleged that Scottrade violated the impartial conduct standards laid out in Labor’s fiduciary rule, which took effect on June 9, 2017. Galvin charged the broker-dealer with “dishonest and unethical activity and failure to supervise” for conducting internal sales contests that violated Labor’s impartial conduct standards. Does it count? ERISA attorneys have argued that Galvin’s complaint was not based on a violation of the DOL fiduciary rule itself, but that Massachusetts took the rule’s impartial conduct standards and applied them to the state’s blue sky laws. Galvin’s response: The case against Scottrade does “deal with the DOL rule.” Scottrade “had their own policy in place” to comply with the rule, and “they acknowledged the rule and engaged in contests designed to reward in violation of the rule.”
Eugene Scalia, an administrative law partner with Gibson, Dunn & Crutcher who is suing Labor over its fiduciary rule, fired back that Galvin’s action is “without merit.” Scalia’s comments are “rhetoric,” Galvin said. “We bring legal actions, and we usually win them.”
Bottom line: “We have in effect a DOL rule that needs to be enforced,” Galvin said.
As to the likely outcome of anticipated revisions by Labor to its fiduciary rule, “I think it’s pretty obvious this administration is hostile toward the rule,” Galvin said. “We think the fiduciary rule is extremely important, and we want to protect it and make sure it’s enforced.”
In the run-up to the expected release later this year of a separate SEC fiduciary rule, Galvin said that he’s also “watching to see whether opponents of the [Labor] rule will attempt to argue that Labor’s fiduciary rule somehow prevents the states from bringing state law-based dishonest and unethical actions.”
Another concern: that the SEC will propose a rule that “would serve to dilute Labor’s fiduciary rule.” The SEC could write a rule to “prevent the states from taking investor protection actions that are unlikely to be taken under the current light-touch regulation coming out of Washington.”
Next in the Scottrade action, there will be an administrative hearing, “Scottrade will have a chance to respond,” Galvin said. “It’s pretty rapid; within 30 days.”
— Check out How Scottrade Could Have Avoided DOL Rule Charges on ThinkAdvisor.