The Consumer Federation of America is calling on regulators to begin enforcing the DOL’s fiduciary rule in the wake of a Massachusetts case against Scottrade for alleged dishonest and unethical sales practices.
“We are writing to urge you to begin to use your own enforcement authority against firms, such as Scottrade, that clearly fail to work ‘diligently and in good faith to comply with the rule,’” Barbara Roper, CFA’s director of investor protection, and Micah Haputman, the CFA's financial services counsel, said in the letter sent Wednesday to Labor Secretary Alexander Acosta.
The DOL has said it would refrain from enforcing its rules if firms are working “diligently and in good faith to comply” during a transition period that runs until July 2019. CFA sent similar letters to Finra and state securities regulators, asking regulators to enforce the DOL’s best practice standards to protect consumers.
“For those who view the department’s good faith enforcement policy as a farce, doing so would send a powerful message that, despite the lengthy implementation delay, the department remains committed to ensuring that retirement savers are protected from the harmful impact of conflicted investment advice. Retirement savers deserve no less,” Roper and Hauptman wrote.
The conduct Scottrade is alleged to have engaged in falls squarely within the DOL’s jurisdiction since it relates to investment advice and rollover recommendations that fail to meet the good faith compliance test, Roper and Hauptman argued.
The Massachusetts Securities Division has accused the discount broker-dealer of aggressive and improper sales practices in retirement accounts in violation of the DOL’s rule—the first such case in the country. William Galvin, the Massachusetts secretary of the commonwealth, is calling for Scottrade to return profits it earned from its alleged activities and seeking an as-yet-undisclosed administrative fine and censure against the firm.
“It is clear, for example, that Scottrade knew its rollover recommendations were covered by the rule and that its practice of conducting sales contests to encourage rollovers were inconsistent with the rule,” Roper and Hauptman wrote.
According to the Massachusetts complaint, before Scottrade’s merger with T.D. Ameritrade, the company maintained a page on its website devoted to the DOL fiduciary rule. It stated that, “When the Department of Labor fiduciary rule takes effect, Scottrade brokerage will serve as a fiduciary when making recommendations to clients regarding the rollover or transfer of a retirement account.”
Scottrade updated its compliance manual to indicate it was ending practices that encourage recommendations based on factors other than the client’s best interests. The updated compliance manual stated that, “The firm does not use or rely upon quotas, appraisals, performance or personnel actions, bonuses, contests, special awards, differential compensation or other actions or incentives that are intended or reasonably expected to cause associates to make recommendations that are not in the best interests of Retirement Account clients or prospective Retirement Account clients,” according to the complaint.
The complaint alleges, however, that the firm ramped up its use of such contests, making no effort to exclude retirement accounts.
Roper and Hauptman cited the allegations in the complaint in their letter to Acosta.
“While the issues in the Scottrade case appear to be particularly stark, there’s no reason to believe they are unique,” Roper and Hauptman wrote, adding that they are concerned that some firms seem to think the DOL’s non-enforcement policy is a signal that they can willfully flout the rule and give conflicted advice that is not in customers’ best interests, without fear of repercussions. “We urge you to take immediate steps to counter that impression.”