The enforcement case brought by the Massachusetts Securities Division against Scottrade for allegedly violating the U.S. Department of Labor’s best interest rules last week illustrates why the Fifth Circuit Court of Appeals needs to vacate the Department of Labor’s fiduciary rule.

That’s the argument of the attorney who represents the nine plaintiffs suing the DOL.

“This enforcement action—which seeks censure, fines and disgorgement, among other penalties, vividly illustrates the urgent need to vacate the rule,” said Eugene Scalia, a partner with Gibson Dunn, in a two-page letter to the court (https://assets.documentcloud.org/documents/4380729/Chamber-Fiduciary-20180216.pdf).

Massachusetts has accused discount broker-dealer Scottrade of aggressive and improper sales practices in retirement accounts in violation of the DOL’s rule—the first such case in the country. Among other actions, William Galvin, Massachusetts’s secretary of the commonwealth, is calling for Scottrade to return profits it earned from the alleged activities and is seeking an as-yet-undisclosed administrative fine and a censure against the firm.

Scalia said the case underscores the fact that state enforcement cases and litigation are likely to ensue if the DOL rule is allowed to stand. “Although Massachusetts’s attempt to use the fiduciary rule in this manner lacks merit,” Scalia said, “the action also shows that the fiduciary rule is exacerbating the risk of litigation, even absent ‘best interest contracts.’”

With such litigation being pursued by state officials, “private plaintiffs can also be expected to exploit the rule to concoct state law claims. 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 50 states. A decision by [the Fifth Circuit Court] will put a halt to that, while also providing important guidance to the Labor Department in any future rule-making proceedings,” Scalia wrote.

Scalia previously served as chief legal officer for the DOL during the administration of President George W. Bush. He is the son of former Supreme Court Court Justice Antonin Scalia. At Gibson Dunn, he has been a high-profile vocal critic of the DOL rule and represented many of its opponents.

“The potential hodgepodge of state enforcement Scalia discusses is a valid issue I think,” said Bruce Ashton, a partner in Drinker Biddle & Reath.

The Massachusetts case against Scottrade, however, is also interesting because of the way the state regulator uses its own supervisory policies and procedures against the broker-dealer, despite the fact that the DOL is not enforcing its “best-interest contract exemption” during a transition period that runs until July 2019, Ashton said.

“What Massachusetts is doing is saying the service provider [Scottrade] went ahead and created supervisory policies and procedures that were in the DOL rule and directed its brokers on how to operate in the interest of its clients, but then failed to live up to its internal policies, so we, Massachusetts, can go after them for that failure, which is a violation of state law,” Ashton said. “It’s a very interesting legal approach.”

Plaintiffs represented by Scalia in the lawsuit include the U.S. Chamber of Commerce, the American Council of Life Insurers, the Financial Services Institute, the National Association of Insurance and Financial Advisors, the Insured Retirement Institute and SIFMA.

The industry plaintiffs were consolidated from three lawsuits, each filed in 2016 in U.S. District Court for the Northern District of Texas. The plaintiffs lost each of their federal cases and then filed appeals in the Fifth Circuit, where the case is pending. The appeals court heard arguments July 31, and many industry experts predicted a ruling by early 2018, but there is growing conjecture that the Fifth Circuit may table the lawsuit to allow the DOL and the Securities and Exchange Commission to finish fiduciary rule-making.

The complaint Massachusetts filed against Scottrade alleges "an aggressive sales culture" that undermined the DOL’s fiduciary rule by encouraging brokers to "drum up additional business" ahead of a planned merger with TD Ameritrade, and during the second half of 2017, when the broker-dealer “knowingly included retirement accounts in the scope of these contests,” according to the Massachusetts administrative order.

As part of their sales contests, Scottrade offered weekly cash prizes in the amounts of $500 and $2,500 to brokers who hit the firm’s cold-call quotas. In one nationwide contest, Scottrade allegedly offered $285,000 in incentives to win and retain clients.

Scottrade is a Massachusetts broker-dealer acquired by TD Ameritrade in September 2017. “We don’t comment on such matters,” said TD Ameritrade spokesperson Alyson Nikulicz. Scottrade did not respond to a request for comment.