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Bay State Regulator Files Fiduciary Rule-Related Complaint

The Massachusetts Securities Division has filed charges against a firm for knowingly violating its internal policies regarding implementation of the DOL fiduciary rule – and taken a shot at the Labor Deparment.

Specifically, Commonwealth Secretary William Galvin, the state’s top securities regulator, has charged Scottrade with “dishonest and unethical activity and failure to supervise” for conducting sales contests that violated the Labor Department’s impartial conduct standards.

In filing the complaint, Galvin also took aim at another target: “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.”

“By instituting this proceeding, the Enforcement Section charges Scottrade with knowingly violating its own internal policies related to the Fiduciary Rule, a clear demonstration that Scottrade has failed to act in good faith to comply with the Fiduciary Rule,” the complaint charges.

The complaint notes that, “prior to the Fiduciary Rule, Scottrade employed a firm-wide culture characterized by aggressive sales practices and incentive-based programs.” However, in response to the fiduciary rule, it notes that Scottrade added identical provisions to both its Brokerage and Investment Advisor Compliance Manuals that said:

The firm does not use or rely upon quotas, appraisals, performance or personnel actions, bonuses, contests, special awards, differential compensation or incentives that are intended or reasonably expected to cause associates to make recommendations that are not in the best interest of Retirement Account clients or prospective Retirement Account clients.

“However,” the complaint notes, “Scottrade subsequently failed to enforce the above provisions, rendering these policies meaningless.”

The complaint explores in some detail sales contests (noting the use of that description, despite language above specifically excluding the use of “contests”). It states that these sales contests “perversely incentivized Scottrade agents to bring in new assets from customers, including through the rollover of retirement assets” – and notes that Scottrade “knowingly included retirement account clients in the scope of these contests.” And, “although it had in place policies designed to ensure compliance with the Fiduciary Rule, Scottrade failed to take any meaningful steps to implement and enforce such policies.”

The complaint goes on to say that training sessions for the sales programs “lauded the use of emotion over logic” in getting a client to bring additional assets to the firm. “These tactics do not represent the behavior of a fiduciary,” it said.

The complaint against Scottrade seeks a cease-and-desist order, a requirement that Scottrade review its supervisory procedures to ensure compliance with applicable state and federal laws, censure and an administrative fine.