Fiduciary regulations continue to advance in states as SEC mulls national standard

New York, Nevada, Maryland and New Jersey are among the states where progress is being made to advance a fiduciary standard for advisers of all stripes

Jan 18, 2019 @ 5:00 pm

By Mark Schoeff Jr.

A New York state lawmaker is optimistic about the chances this year for his fiduciary-disclosure bill, while a Maryland senator is poised to introduce a measure that would raise standards there.

Adding to the mix is the Nevada Securities Division, whichreleased on Friday afternoonproposed regulations to implement the state's fiduciary law that was enacted in 2017.

In addition, the New Jersey Bureau of Securities could introduce a fiduciary rule in coming weeks.

While state activity ramps up, the Securities and Exchange Commission is considering its own investment advice reform proposal. Industry opponents of state-level fiduciary laws assert that the SEC should set the policy.

"We always have preferred a national level of standard of conduct for predictability and uniformity," said Andrew Remo, director of legislative affairs at the American Retirement Association. Various state laws "would make the situation for companies that operate in different states complex and costly."

"The vast majority of states will probably wait" to see the SEC's final rule before taking substantial action, according to George Michael Gerstein, counsel at Stradley Ronon Stevens & Young.

Nevada is moving ahead by introducing draft regulations that require brokers to meet a fiduciary standard of care at all times if they manage a client's assets or create periodic financial plans. Under other circumstances, the broker fiduciary duty is transaction-by-transaction. Brokers would violate the rules if they put their own or their firms' interests ahead of their clients' interests.

The Nevada regulation says brokers who are dually registered as investment advisers are presumed to be acting as an investment adviser and cannot be exempt from the fiduciary requirement. The measure also says selling proprietary products and earning commissions are not necessarily fiduciary breaches.

Like the SEC proposal, the Nevada draft regulation does not define "best interests" or how brokers can mitigate conflicts.

"There are areas where we want to see clarification or improvements, but it gets a lot of things right," said Barbara Roper, director of investor protection at the Consumer Federation of America.

A public comment period on Nevada's proposed regulations is open until March 1.

Many observers expected the SEC to release a final rule by this summer, but that timeline may be stretched out thanks to the partial government shutdown that has halted most SEC activity.

The longer it goes, states could grow impatient.

"Eventually, that creates a vacuum, and there's perceived inactivity in this policy area," Mr. Gerstein said.

In New York, Assemblyman Jeffrey Dinowitz, D-Bronx, reintroduced on Jan. 10 the Investment Transparency Act, which requires brokers and other non-fiduciary financial advisers to tell their clients that they can recommend high-fee products even if they're not in the clients' best interests.

The bill text has not been posted, but the language of the measure is identical to a bill Mr. Dinowitz introduced last year that died in the legislature, according to an aide.

Mr. Dinowitz is confident the legislation will go farther this year because Democrats now control the New York Senate.

"With the new majority, every piece of pro-consumer legislation has new life, and we plan to enact legislation that puts the interests of our constituents' bottom line ahead of major corporations," Mr. Dinowitz said in a statement to InvestmentNews. "Legislation like the Investment Transparency Act doesn't allege that non-fiduciaries are criminal actors or 'bad guys'; it simply lets people know who they're doing business with."

Earlier this week, the Maryland Financial Consumer Protection Commission released a report urging state lawmakers to raise investment-advice standards.

Last year, Sen. James Rosapepe, D-College Park, wrote a fiduciary-duty bill but then withdrew it after protests from financial industry lobbyists. An aide said Friday he will soon introduce a bill that would enact the commission's recommendations, including a fiduciary provision.

"The commission recommends that the General Assembly pass legislation that provides that a broker-dealer, broker-dealer agent, insurance producer, investment adviser or investment adviser representative … would be held to a fiduciary duty to act in the best interest of the customer without regard to the [other] financial interest of the person or firm providing the advice," the report states.

The commission also said that the fiduciary standard for the state's investment advisers should be strengthened because it is weaker than the national standard. The panel cautioned that books-and-records requirements for brokers should not be stronger than those required under federal law.

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