State efforts on fiduciary standards slow

Maryland senator pulls provision requiring such duty from bill, Nevada's time line for regulation remains uncertain

Apr 3, 2018 @ 2:22 pm

By Mark Schoeff Jr.

Activity at the state level to raise investment-advice standards has slowed recently, as a Maryland lawmaker withdrew a fiduciary provision from his bill and the time line for a Nevada regulatory proposal remains uncertain.

The Maryland Senate approved a financial reform bill on March 19 that includes a provision instructing the Maryland Financial Consumer Protection Commission to study the outcome of federal efforts on fiduciary duty at the Labor Department and the Securities and Exchange Commission, and then determine whether Maryland should enact its own fiduciary law.

That language is weaker than a provision in the original bill that would have established a fiduciary duty law.

The author of the bill, Maryland State Sen. James Rosapepe, D-College Park, said he will give the DOL and SEC a chance to act before Maryland steps in.

But he's not confident the Trump administration will uphold the DOL rule, whose full implementation has been delayed while it undergoes a review that could lead to major changes.

"We're very serious about the [Maryland] commission looking at this in detail and figuring out what, if anything, we need to do next year in Maryland," Mr. Rosapepe said. "The Trump administration has been rolling back protections for the economy left and right."

Last July, Nevada enacted a law that extends the state's fiduciary law beyond financial planners to include brokers, sales representatives and investment advisers. It also gave the state's securities administrator, Diana Foley, authority to promulgate regulations that define violations of the law and compliance.

Ms. Foley said her office has been working diligently on a regulatory proposal, but doesn't know when it will be released.

"We've tried to be very thoughtful about this process," she said. "We've received a lot of comments. We don't have a date certain."

Legislation has been introduced in New York and New Jersey that would require financial advisers to disclose whether they are fiduciaries. A pending bill in Illinois also is focused on disclosure. None of them has advanced.

"Over the last six-to-nine months, a number of states have taken a wait-and-see approach," said George Michael Gerstein, counsel at Stradley Ronon Stevens & Young. "The 2019 legislative session is probably where we would see a response on the legislative front at this point."

In February, Massachusetts Secretary of the Commonwealth brought an enforcement case against Scottrade that was based in part on the firm's alleged violations of procedures it had put in place to comply with parts of the DOL rule that have been implemented.

But a recent split decision by the 5th Circuit Court of Appeals to vacate the DOL regulation may have chilled similar moves. The agency has until April 30 to request an en banc rehearing of the case. The decision would become effective on May 7.

"Since the 5th Circuit decision, there hasn't been much action in the states," said Kevin Walsh, an attorney at Groom Law Group. "That's not surprising, because the decision has jumbled the landscape. It seems that state-level actors are trying to figure out what the next steps are."

The 5th Circuit decision hasn't made an impact in Nevada.

"It hasn't directly affected our time line," Ms. Foley said. "We're aware of all the [activity] where the fiduciary duty of broker-dealers is being impacted."

The Financial Services Institute, which represents independent broker-dealers and financial advisers, wants states to step back while federal regulators sort out investment-advice standards. The organization lobbied against the original fiduciary provision in the Maryland bill.

"With states moving forward, there would be the possibility of a patchwork of different regulations that would confuse consumers as well as our member advisers," said Michelle Carroll Foster, FSI associate vice president for state affairs. "We hope the 5th Circuit ruling has sent a message: Hold off until the SEC adopts a rule."


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