DOL Fiduciary Rule Enforcement: How Massachusetts May Have Provided the Spark for a Massive Fire

On Thursday, February 15th, the state of Massachusetts charged Scottrade with dishonest and unethical conduct and a failure to supervise. This is believed to be the first known enforcement action under the Department of Labor’s fiduciary rule.

Where this will end up, nobody knows, but it could be the spark that triggers a fire within the financial industry. According to the regulator’s complaint, Scottrade violated impartial conduct standards by conducting some sort of sales contest with incentives for their employees to bring in new assets.

Let’s talk about the reality of this: anybody who has been in the industry for any length knows this happens all the time. It has been a part of the wirehouse and insurance sales culture for decades. The problem is this: far too many financial professionals (and the firms they associate with) are under the impression that the Fiduciary Rule (or Conflict of Interest rule) isn’t yet in effect.

As somebody who is actively involved the everyday communications with our own affiliated advisors, as well as the daily efforts to attract new professionals to our firm, I can tell you that there is a great amount of confusion surrounding this rule. In many cases, it isn’t confusion; it is flat out ignorance.

This is what advisors need to know: this rule is in effect. Today. Now. The “delay” that was triggered as a result of the Trump administration only impacted the second phase of the rule. Here’s where it gets a little fuzzy – it was assumed (due to statements coming from Washington, D.C.) that there wouldn’t be enforcement action taking place. The state of Massachusetts has proven that assumption to be faulty. And it won’t surprise me one bit if other states follow suit.

What does this mean to you as a financial professional? Much of that depends on the firms with whom you affiliate, the licensure you maintain, and the recommendations you make. Don’t be mistaken, regardless of your answer to the three questions items listed above, the rule still applies to you. The risk/exposure may be different depending upon your response to those items.

It really comes down to operating in an environment where impartial conduct standards are established and ensuring that those standards are adhered to by the institution and the representatives of that institution. For example, if you are affiliated with a broker-dealer or corporate RIA, has there been a process and standard established to review recommendations for best interests, as well as an honest effort to reduce or eliminate major conflicts of interest? If you affiliate with an insurance brokerage entity (FMO/IMO/MGA), do they understand the importance of adhering to this standard? Unfortunately, many are still running sales contests, sales incentives, and offering production-based compensation. Knowingly or not, many of these activities are a direct violation of the portion of the rule that is in effect and they are putting the professionals with whom they work in the cross-hairs of a potentially devastating regulatory mess.

This isn’t just an opinion. It’s a substantiated fact as evidenced by the state of Massachusetts. You may love the rule. You may hate the rule. You may be like me and think there should be a logical compromise to this regulation that could accomplish the goals of putting the interests of clients first without creating such a confusing and complex overhaul to the way business is done within all of the different entities that operate in the financial industry. None of that matters though. Our feelings about the rule today don’t change the fact that we all need to operate in a new environment. Sadly, some professionals aren’t quite there yet. And what’s even worse is that many financial institutions (broker-dealers, RIAs, FMOs, etc.) aren’t there yet either. And ignorance won’t be much of a defense if a regulator knocks on the door.

In the meantime, this Scottrade charge will be an interesting story to keep an eye on. You may not be aware, but TD Ameritrade is in the final stages of its acquisition of Scottrade. I’m sure this is the last thing they wanted to deal with as this thing gets buttoned up. If it turns out that the Massachusetts regulators have a leg to stand on when it comes to enforcement actions, you can bet that it may pave the way for other states to follow suit.

For more information and details on DOL Requirements, you can refer to our DOL Executive Summary and DOL Extension Fact Sheet.

For those of you already affiliated with USA Financial, you can find this information on the dashboard.

 

 

All the best,

Mark Mersman

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