Enforcement Section of the Mass. Sec. Div. of the Office of the Sec'y of the Commonwealth v. Scottrade, Inc.

• Decision Date: 16 August 2018
• Docket Number: Civil Action No. 18-10508-NMG
• Citation: 327 F.Supp.3d 345
• Parties: ENFORCEMENT SECTION OF the MASSACHUSETTS SECURITIES DIVISION OF the OFFICE OF the SECRETARY OF the COMMONWEALTH, Plaintiff, v. SCOTTRADE, INC., Defendant.
• Court: U.S. District Court — District of Massachusetts

327 F.Supp.3d 345

ENFORCEMENT SECTION OF the MASSACHUSETTS SECURITIES DIVISION OF the OFFICE OF the SECRETARY OF the COMMONWEALTH, Plaintiff,

v.SCOTTRADE, INC., Defendant.

Civil Action No. 18-10508-NMG

United States District Court, D. Massachusetts.

Signed August 16, 2018

Bryan J. Lantagne, Secretary of State's Office, Pierce O. Cray, Attorney General's Office, Amanda I. Morejon, Massachusetts Attorney General's Office, Boston, MA, for Plaintiff.

Cameron S. Matheson, Murphy & McGonigle, P.C., Glen Allen, VA, Christian R. Bartholomew, Pro Hac Vice, Jenner & Block, LLP, Washington, DC, John K. Wells, Pete S. Michaels, Greenberg Traurig LLP, Boston, MA, for Defendant.

MEMORANDUM & ORDER

GORTON, DISTRICT JUDGE.

This is a dispute between the Enforcement Section of the Massachusetts Securities Division of the Office of the Secretary of the Commonwealth ("the Enforcement Section" or "plaintiff") and Scottrade, Inc., a Massachusetts registered broker-dealer ("Scottrade" or "defendant"). Plaintiff alleges that Scottrade violated its internal policy by hosting incentivized sales contests, thus violating state law. Scottrade responds that the Enforcement Section is merely attempting to enforce federal standards that were set forth in the now-vacated "Fiduciary Rule." After plaintiff filed an administrative complaint with the Securities Division, defendant removed the action to this Court. Pending before the Court is plaintiff's motion to remand.

I. Background

The Secretary of the Commonwealth of Massachusetts, William F. Galvin, is responsible for administrating the Massachusetts Securities Act, M.G.L. c. 110A, and "may employ such assistants and others employees as are required ... for the administration and enforcement" of the Act. M.G.L. c. 9, § 10A. Pursuant to that latter provision, the Secretary established the Securities Division of the Office of the Secretary of the Commonwealth to

administer and enforce [the Securities Act,] M.G.L. c. 110A and [the regulations promulgated thereunder], 950 C.M.R. 10.00 through 14.413.

950 C.M.R. § 14.406(A)(1).

In February, 2018, the Enforcement Section filed an administrative complaint against Scottrade with the Securities Division. "In anticipation of its obligations under the upcoming Fiduciary Rule," the Enforcement Division alleges, Scottrade added an Impartial Conduct Standards section to its Brokerage and Investment Advisor Compliance Manual that provides:

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 interest of Retirement Account clients or prospective Retirement Account clients.

Because Scottrade held sales contests between June and July 2017 ("the Q3 sales contest") and between August and September, 2017 ("the Q4 sales contest"), the Enforcement Division claims,

Scottrade violated its own internal policies regarding the Fiduciary Rule, thereby failing to act in good faith to comply with the Fiduciary Rule.

The Enforcement Section alleges that Scottrade's conduct 1) constitutes "unethical or dishonest conduct or practices" in the securities business, in violation of M.G.L. c. 110A, § 204(a)(2)(G), and 2) demonstrates that Scottrade "failed reasonably to supervise agents, investment adviser representatives or other employees", in violation of M.G.L. c. 110A § 204(a)(2)(J).

The "Fiduciary Rule" to which the complaint refers is a group of seven rules that expand the "investment advice fiduciary" definition in the Employee Retirement Income Security Act of 1974 ("ERISA"), codified as amended at 29 U.S.C. § 1001 etseq., and the Internal Revenue Code, 26 U.S.C. § 4975. The Fiduciary Rule regulates financial service providers, such as Scottrade, that provide services to holders of Individual Retirement Accounts ("IRAs"). One such regulation is the "Best Interest Contract Exemption", which permits investment advice fiduciaries to avoid prohibited transaction penalties if they enter into contracts with clients that, inter alia, affirm their fiduciary status and incorporate "Impartial Conduct Standards", including duties of loyalty and prudence. See 81 Fed. Reg. 21002 (Apr. 8, 2016), corrected at 81 Fed. Reg. 44773 (July 11, 2016), and amended by 82 Fed. Reg. 16902 (Apr. 7, 2017).

Various business groups have challenged the Rule, alleging that 1) it was inconsistent with the governing statute, 2) the DOL lacked authority to regulate the affected servicers and providers, 3) the DOL imposed legally unauthorized contract terms, 4) the Rule violated the First Amendment and 5) the Rule was arbitrary and capricious. See Chamber of Commerce of United States of Am. v. United States Dep't of Labor, 885 F.3d 360, 363 (5th Cir. 2018). In March, 2018, the United States Court of Appeals for the Fifth Circuit ("the Fifth Circuit") held that the Rule conflicted with the text of ERISA, was "unreasonable" under Chevron, U.S.A., Inc. v. N.R.D.C., Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), and was an "arbitrary and capricious agency action" in violation of the Administrative Procedure Act, 5 U.S.C. § 706. That court "vacate[d] the Fiduciary Rule in toto". Id. at 388.

Scottrade simultaneously removed this administrative action to the United States District Court for the District of Massachusetts. It asserts that this Court has federal question jurisdiction because the matter "arises under and is governed by ERISA". Pending before the Court is plaintiff's motion to remand the case to the Enforcement Section of the Massachusetts Securities Division.

II. Status of Fifth Circuit vacatur

As a preliminary matter, the Court notes that Scottrade proceeds under the assumption that the decision of the Fifth Circuit vacating the Fiduciary Rule binds this Court. At oral argument, its counsel posited that

if a federal appellate court vacates an order, it isn't that it existed and no longer exists; it's as if it never existed at all.... I don't know that there's a contrary view, frankly.

That opinion is itself contrary to

the traditional conception that a judge does not so much strike down an unconstitutional law as refuse to apply it.

Samuel Bray, Multiple Chancellors: Reforming the National Injunction, 131 Harv. L. Rev. 417, 451 (2017).

As articulated in Marbury v. Madison, 5 U.S. 137, 178, 1 Cranch 137, 2 L.Ed. 60 (1803), a court determines "which of [ ] conflicting rules governs the case." Cf. United States v. Raines, 362 U.S. 17, 21, 80 S.Ct. 519, 4 L.Ed.2d 524 (1960) ("This Court, as is the case with all federal courts, has no jurisdiction to pronounce any statute ... void, ... except as it is called upon to adjudge the legal rights of litigants in actual controversies.") (citation and internal quotation marks omitted). There is disagreement with respect to when nationwide injunctions are appropriate. Compare Nat'l Mining Ass'n v. U.S. Army Corps of Eng'rs, 145 F.3d 1399, 1409 (D.C. Cir. 1998) ("[W]hen a reviewing court determines that agency regulations are unlawful, the ordinary result is that the rules are vacated–not that their application to the individual petitioners is proscribed.") (citation omitted) with City & Cty. of San Francisco v. Trump, No. 17-17478, 897 F.3d 1225, 1224, 2018 WL 3637911, at *13 (9th Cir. Aug. 1, 2018) (describing nationwide injunctions as necessary only in "exceptional cases"). Nationwide injunctions have been criticized as a matter of doctrine and policy. See Trump v. Hawaii, ––– U.S. ––––, 138 S.Ct. 2392, 2429, 201 L.Ed.2d 775 (2018) (Thomas, J., concurring) ("[U]niversal injunctions are legally and historically dubious.) and Arizona v. Evans, 514 U.S. 1, 23 n.1, 115 S.Ct. 1185, 131 L.Ed.2d 34 (1995) (Ginsburg, J., dissenting) ("[W]hen frontier legal problems are presented, periods of ‘percolation’ in, and diverse opinions from, state and federal appellate courts may yield a better informed and more enduring final pronouncement by this Court.").

As the following analysis may demonstrate, whether or not the Fifth Circuit has vacated the Fiduciary Rule on a nationwide and universal basis is not dispositive of this motion. The statement of that court that it vacates "the Fiduciary Rule in toto" appears immediately after it explains that the "comprehensive regulatory package is plainly not amendable to severance." See Chamber of Commerce, 885 F.3d at 388. Thus, "in toto" presumably refers to how much of the Fiduciary Rule was being vacated, i.e. all of it, and not that the Court was invoking nationwide and universal relief. There is no explicit statement that the Court expected its judgment to apply nationwide and therefore defendant's contention that the Fifth Circuit decision binds this Court is tenuous at best.

III. Motion to remand

Plaintiff asserts that neither the complete preemption nor substantial federal question exception to the well-pleaded complaint rule applies and, as a result, federal question jurisdiction does not exist and removal was improper. Removal was also purportedly unwarranted because the administrative complaint was not initially brought in a state court which is a prerequisite for removal.

Defendant responds that federal question jurisdiction exists because ERISA completely preempts the plaintiff's claims and resolution of the state law claims necessarily involves consideration of a substantial issue of federal law. Scottrade contends, moreover, that the action was brought in the equivalent of a state court under the relevant controlling authority, thus satisfying the removal statute.

District courts "have original jurisdiction of all civil actions arising under" the laws of the United States. 28 U.S.C. § 1331. All cases removed from state court shall be remanded if at "any time before final judgment it appears that the district court lacks subject matter jurisdiction." 28 U.S.C. § 1447(c). The removal statute is to...