State-level activity slows on fiduciary legislation

But some states are still pursuing investment advice reform as the Labor Department's rule dies and the SEC works on its own proposals

Jul 12, 2018 @ 2:05 pm

By Mark Schoeff Jr.

Legislation in the New York Assembly that would have required disclosures by non-fiduciary financial advisers died without a floor vote, but its sponsor was encouraged by its progress and will push the measure again next year.

Similar bills in New Jersey and Illinois have not advanced as far but are still alive.

Although movement has been slow, state activity does signal continued interest in investment advice standards, even as the Labor Department's fiduciary rule wanes and the Securities and Exchange Commission works on its own advice reform proposal.

The Nevada legislature approved a bill that was signed into law last year that would require all financial advisers in the state to provide a fiduciary standard of care. The rulemaking that would implement the law is pending.

"We are hoping to release proposed regulations soon on the fiduciary duty law passed in Nevada last session," Diana Foley, Nevada securities administrator, wrote in an email. "We do continue to stay abreast of any law or regulation changes that may be informative, or may impact broker-dealers or investment advisers, such as the SEC proposals and the federal court cases involving challenges to the DOL rule."

The New York bill, written by Assemblyman Jeffrey Dinowitz, D-Bronx, advanced through the Judiciary Committee as well as a secondary committee before meeting its end.

There was no companion bill in the New York Senate, which limited its viability, according to William Schwartz, legislative director for Mr. Dinowitz. But he's encouraged that it got as far as it did.

"It was good progress for a one-house bill," Mr. Schwartz said. Mr. Dinowitz intends to re-introduce the measure in January.

The legislation requires that non-fiduciary advisers make a stark disclosure to clients: "I am not a fiduciary. Therefore, I am not required to act in your best interests and am allowed to recommend investments that may earn higher fees for me and my firm, even if those investments may not have the best combination of fees, risks and expected returns for you."

Opposition to the DOL fiduciary rule by the Trump administration inspired the bill. If there hadn't been efforts underway in Washington to potentially water down the Obama-era regulation, New York legislators wouldn't have had as much urgency to act.

"If Hillary Clinton becomes president, this bill sits in the Judiciary Committee," Mr. Schwartz said.

In New Jersey, nearly identical legislation is sitting in House and Senate committees after being introduced in January.

The sponsor of the House bill, Assemblywoman Nancy Pinkin, D-Edison, doesn't anticipate action before the fall.

"We're talking with the financial industry about their concerns; that's why we haven't moved forward," Ms. Pinkin said.

She has assumed new committee leadership responsibilities, which has consumed time she could otherwise devote to the bill, but she continues to pursue it.

"I still think it's an important issue," Ms. Pinkin said.

Earlier this year in Maryland, fiduciary language was taken out of a financial reform bill, but the sponsor said he will be monitoring developments at the SEC.

In Illinois, a bill has been introduced with the title Investment Advisor Disclosure Act but not yet any legislative text.

George Michael Gerstein, counsel at Stradley Ronon Stevens & Young, said that other states where fiduciary activity could percolate include California, Massachusetts and Michigan. Many legislatures are out of session until next year.

"There's a wait-and-see approach at this point," he said. "In January and February, we may see it bubble up again."

In the meantime, he foresees more enforcement actions at the state level along the lines of the case Massachusetts Secretary of the Commonwealth William Galvin brought against Scottrade for allegedly not following policies the firm put in place to adhere to the DOL fiduciary rule.

"The bigger risk in the short- to medium-term is enforcement," Mr. Gerstein said. "You'd want to align policies and procedures to actual practices so there's not a gap."


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