The fiduciary rule just received a jolt from a state regulator.
Massachusetts charged Scottrade with dishonest and unethical conduct and failure to supervise on Thursday, in what is the first known enforcement action under the Department of Labor’s revised fiduciary rule.
Scottrade, which was recently acquired by TD Ameritrade, held at least two sales contests involving retirement assets after the partial implementation of the fiduciary rule last June, Massachusetts Secretary of the Commonwealth William Galvin’s office said.
“Scottrade’s own internal-use materials instructed agents to target a client's ‘pain point’ and emotional vulnerability, while training sessions lauded the use of emotion over logic in getting a client to bring additional assets to the firm,” according to the regulator’s complaint. “These tactics do not represent the behavior of a fiduciary.”
By giving out awards and incentives to participating Scottrade agents, the firm violated its impartial conduct rule and failed to make a good faith effort to comply with the fiduciary rule, regulators said. Galvin’s case comes after other states have passed or are considering their own fiduciary legislation.
The rule’s fate remains uncertain after President Trump’s administration delayed provisions around class actions and the best interest contract exemption until 2019. SEC Chairman Jay Clayton has pledged to work with FINRA and the Labor Department to craft changes to the rule. Galvin isn’t waiting for them to act, he says.
“Despite the efforts in Washington to kill the fiduciary rule, the impartial conduct provision remains in place,” Galvin said in a statement. “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.”
A spokesman for the Labor Department declined to comment on Galvin’s remarks.
A spokeswoman for TD Ameritrade, which closed on its $4 billion cash-and-stock purchase of Scottrade in September, also declined to comment.
The Omaha, Nebraska-based firm’s standard practice is not to comment on pending legal or regulatory complaints, Kim Hillyer wrote in an email. The combined firm manages more than $1.1 trillion in assets across nearly 11 million client accounts, according to TD Ameritrade.
The case provides new urgency to the questions surrounding the rule. Labor Department officials promised that they wouldn’t pursue claims against “fiduciaries working diligently and in good faith to comply” with the rule during the phased-in implementation, they said in a field assistance bulletin issued in May.
The rule’s impartial conduct standard requires retirement advisors to serve clients’ best interests while refraining from misleading statements and collecting only reasonable compensation. The standard went into effect June 9.
Three days later, though, according to investigators, a Scottrade divisional vice president sent an email updating regional sales managers on the first week of what the vice president called the “Q3 Run the bases contest,” according to Massachusetts regulators’ administrative complaint.
“Very soon, we will get an official count on how we did, and more exciting, a chance to see where we stack up against our peers on our official scoreboard!” the executive, who wasn’t named in the complaint, said in the email. “Happy Selling!”
Scottrade had shown a firm-wide history of aggressive sales practices and incentives before the rule, according to investigators. The company added impartial conduct standards to both its brokerage and investment advisor compliance manuals in anticipation of the rule, investigators said.
The policies specifically stated that the firm does not rely on contests or awards that “are intended or reasonably expected to cause” agents or associates to make recommendations that are not in a current or prospective retirement client’s best interest, according to the complaint.
However, the firm expanded its contests rather than curtailed them, regulators say. The third quarter contest offered representatives $285,000 in cash prizes, and the fourth quarter contest included weekly cash prizes of $500 and $2,500, according to investigators.
Scottrade carried out weekly raffles open to agents who made set numbers of client contacts or cold calls, investigators say. In the third quarter contest, the top branches based on net new assets received $2,500 per agent, according to investigators.
Galvin’s office is seeking a fine, disgorgement of profits, censure and a cease-and-desist order requiring a full review of Scottrade’s supervisory policies.
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