Thursday, February 15, 2018

Massachusetts Alleges Scottrade Used Emotional Manipulation and Sales Contests for Retirement Accounts

Earlier today, the Enforcement Section of the Massachusetts Securities Division filed an administrative complaint against Scottrade.  The complaint alleges that Scottrade "knowingly violated its own internal policies designed to ensure compliance with the United States Department of Labor ("DOL") Fiduciary Rule by running a series of sales contests involving retirement accounts."  It may be the first state enforcement action seeking to force brokerages to comply with the DOL Fiduciary Rule.

More specifically, Massachusetts took issue with Scottrade's sales contests because the DOL's Fiduciary Rule requires that "advice to retirement account customers must be based on the best interest of customers, not the best interests of the firm." On paper, Scottrade had enacted impartial conduct standards for its customers' retirement accounts.  The brokerage's compliance manual includes a subsection on incentives, saying:

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 to reasonably expected to cause associates to make recommendations that are not in the best interest of Retirement Account clients or prospective Retirement Account clients.

Despite this provision and the DOL Fiduciary Rule, Scottrade allegedly ran national sales contests and offered rewards for selling customers and causing them to move their assets to Scottrade.  How much of an impact the sales contests had on employee behavior may be difficult to know.  An internal email from a Scottrade Divisional Vice President seems to indicate that the contest had an impact on employee behavior:

The first week of the Q3 "RUN-THE-BASSES" contest is done, and we have a few regions off to a SCREAMING start [] You certainly knocked the cover off the ball!  Some would say you knocked it out of the park!  Very soon, we will get an official count on how we did, and more exciting, a chance to see where we stack-up against our peers on our official scoreboard! [. . .]  Happy Selling!

In contrast to the intense internal focus on these sales contests, Scottrade's retirement customers were not always aware of the incentives that might be shaping the financial advice they received.  One representative told the Massachusetts enforcement section that the prizes and sales contests were not disclosed to clients during the conversations.

The Massachusetts complaint also contains troubling allegations that Scottrade trained its staff to identify customers' emotional needs and then use them to gather new assets, including a focus on emotional needs that "are not rational or logical."  The complaint alleges that "Scottrade's own internal-use materials instructed agents to target a client's 'pain point' and emotional vulnerability," with training sessions lauding "the use of emotion over logic in getting a client to bring additional assets to the firm."  It's difficult to square using customers emotional needs to manipulate them into using Scottrade with giving advice in the best interest of customers.  The Massachusetts complaint does not reveal whether the Scottrade compliance manual contains any provision about the appropriate level of emotional manipulation for retirement customers.

Now that Massachusetts has filed this administrative complaint, it opens up questions about what happens next.  Other states may follow after Massachusetts and file their own enforcement actions.  It's also possible that FINRA will bring its own enforcement proceeding.  FINRA Rule 3110 requires firms to "establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations."  FINRA might also consider whether Scottrade violated FINRA Rule 2010, requiring its member firms to "observe high standards of commercial honor and just and equitable principles of trade."

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