On August 16, 2018, the United States District Court for the District of Massachusetts granted a motion for remand filed by the Enforcement Section of the Massachusetts Securities Division of the Office of the Secretary of the Commonwealth (“Enforcement Section”) in Enforcement Section’s action against Scottrade, Inc. (“Scottrade”). By way of background, the Enforcement Division commenced an action against Scottrade in the Massachusetts Securities Division in February 2018. In the Complaint, the Enforcement Division alleged that Scottrade violated internal procedures Scottrade enacted to comply with the impartial conduct standards of the DOL’s “fiduciary rule” by conducting incentivized sales contests. According to the Enforcement Section, Scottrade’s failure to comply with its internal procedures amounted to a violation of two Massachusetts statutes. Those statutes prohibit “unethical or dishonest conduct or practices” in the securities business and require an entities in the securities industry to “reasonably . . . supervise agents, investment adviser representatives or other employees.”
Scottrade removed the action from the Securities Division to federal district court on federal question grounds. Distilled to its essence, Scottrade’s position was that it could remove the Enforcement Division’s complaint because it raised a question that “arises under and is governed by ERISA.” Specifically, Scottrade argued that ERISA preempted the MA Enforcement Division’s complaint.
In remanding the action, the district court first noted that the case did not require the resolution of any issues under ERISA. The court held that the claims did not implicate ERISA or the DOL’s fiduciary rule because the only determination that would need to be made is whether Scottrade violated its internal policies and, if so, whether those violations were illegal under Massachusetts law. The district court went on to further hold that ERISA preemption was not satisfied because the Enforcement Division was not within the class of persons who are eligible to bring claims under ERISA. Finally, the district court held that an action before the Securities Division was not brought in “state court,” as required to trigger removal under the federal removal statute, because the Securities Division is not a “court.”
While Scottrade’s arguments presented some relatively novel legal issues regarding removal and federal court jurisdiction, the outcome is not terribly surprising. The Enforcement Division’s claims, although based on policies adopted in response to the DOL’s fiduciary rule, do not require a court to address whether ERISA or the fiduciary rule were violated in resolving the case on the merits. Rather, as the district court held, the adjudication of the claims only requires a determination as to whether Scottrade’s alleged violations of its internal procedures constitutes a violation of the Massachusetts statutes the Enforcement Division is relying upon.
In terms of next steps, it is likely that the case will proceed before the Securities Division. Any attempt by Scottrade to appeal the remand order is unlikely to succeed. An appellate court can review an order for remand only under very limited circumstances, none of which appear to be present here.
William Mandia represents financial institutions and insurers in complex commercial and class action litigation. He regularly defends and advises life insurers, intermediaries, banks, broker-dealers, investment advisers, and other financial services providers in connection with sales practices claims arising from a wide range of financial and life insurance products, including, but not limited to, claims for alleged breach of fiduciary duty, fraud, and violations of state consumer protection laws.