Scottrade

Lawsuit Appellants: State Case Against Scottrade Highlights Why DOL Rule Needs to Go

Plaintiffs SIFMA, the Financial Services Institute and the Insured Retirement Institute argue that the Scottrade case highlights firms’ undue risks of facing fractured, state-by-state enforcement under the DOL rule.

The plaintiffs in the lawsuit against the Department of Labor fiduciary rule, including the Chamber of Commerce, filed a document in the U.S. Court of Appeals for the Fifth Circuit last week, urging the Court to vacate the rule in light of Massachusetts’ recent charges against Scottrade.

William Galvin, secretary of the Commonwealth of Massachusetts, filed the complaint against Scottrade last Thursday, alleging the firm knowingly violated the DOL fiduciary rule by holding a series of call nights and sales contests to drum up new business ahead of its planned merger with TD Ameritrade.

The plaintiffs, which include industry groups such as SIFMA, the Financial Services Institute and the Insured Retirement Institute, argue that the Scottrade case “vividly illustrates the urgent need to vacate the rule,” and highlights how the rule imposes costs and burdens on their members by exposing them to such claims as the case in Massachusetts.

Although the second phase of the DOL rule implementation has been delayed until July 1, 2019, the impartial conduct standards took effect June 9, 2017. Scottrade added language to its brokerage and investment advisor compliance manuals to reflect that, saying the firm does not rely upon quotas, bonuses, contests and other things that would cause its employees to make recommendations that would not be in the best interest of retirement plan clients. Yet, Galvin argues, they did just that.

The plaintiffs say this is an example of how the DOL rule is “exacerbating the risk of litigation” in that it will lead private plaintiffs to exploit the rule on a state level.

“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,’” writes Eugene Scalia, a partner at Gibson Dunn & Crutcher and the lead attorney in the suit. “A decision by this Court will put a halt to that, while also providing important guidance to the Labor Department in any future rulemaking proceedings.” 

Stephen P. Wilkes, partner at The Wagner Law Group, says recent actions taken by various states to enhance their fiduciary legislation are out of concern for their own citizenry.

“I think the states see the temporary status—this transitional status, if you will, of the Department of Labor—as leaving an opening for certain wrongs to occur or exploitations of some of their citizenry,” Wilkes said. “They’re concerned that the DOL is stepping back, so I think many of the states are taking more initiative on the state level on the theory that, ‘We’re not sure how long this transition period will last.’” 

But it also raises jurisdictional issues.

“If the DOL rule is federal law, it should be enforced by the DOL,” Wilkes said. “Can the states really enforce it? What [Massachusetts has] really done is taken the back door. What they’re really saying is that the DOL is not enforcing its own rule vis-a-vis Scottrade.”

The U.S. Court of Asppeals is expected to make a decision on the lawsuit soon.

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