State regulators urge SEC not to try to block state fiduciary laws

NASAA doesn't want regulator to assert federal preemption in advice rule

Apr 30, 2019 @ 1:56 pm

By Mark Schoeff Jr.

State regulators are urging the Securities and Exchange Commission not to try to block state fiduciary laws and regulations through the agency's investment advice reform rule.

In an April 25 comment letter to the agency, the North American Securities Administrators Association Inc. said the SEC advice measure — the centerpiece which is Regulation Best Interest — is the wrong place to sort out whether SEC rules hold sway.

"To the extent concerned parties have disputes about the scope of preemption, these disputes are more appropriately addressed through the courts," Michael Pieciak, NASAA president and Vermont commissioner of financial regulation, wrote. "The commission need not — and should not — expose any final Reg. BI rulemakings to this thorny issue."

The state regulators were responding to a March 29 comment letter from the Securities Industry and Financial Markets Association that suggested the SEC should include pre-emption language in the final Regulation Best Interest, which is likely to be released this summer.

"A state-by-state approach to B-D conduct standards would introduce a new level of investor confusion that would undercut not only the SEC's prospective Reg BI but also the interest of investor protection generally," wrote Kevin Carroll, SIFMA managing director and associate general counsel.

The financial industry generally opposes state-level fiduciary proposals that have been introduced by state regulators in Nevada and New Jersey and have been considered by the state legislature in Maryland. Industry trade associations argue the SEC advice rule should set a national standard.

Mr. Carroll said the SEC should cite the National Securities Markets Improvement Act in asserting its authority over states, whose rules would cover both investment advisers and brokers.

"The purpose of doing so would be to highlight that NSMIA preempts states from regulating federally registered RIAs and from imposing books and records requirements on B-Ds that differ from, or are in addition to, federal requirements," Mr. Carroll wrote.

The state regulators countered that SIFMA's conclusion that the SEC can preempt states in regulating brokers would essentially neuter state-level oversight.

"The plain language of this statement would suggest that the myriad state laws applicable to broker-dealers today are unenforceable," Mr. Pieciak wrote.

Most observers anticipate a lawsuit over state fiduciary regulations.

Although the comment period for the SEC investment advice rule package concluded last August, the letters continue to come in. In February, a group of former SEC chief economists filed a letter asserting that the economic impact analysis for Regulation Best Interest was inadequate.

In a comment letter last week, six investor advocacy groups criticized the proposed SEC advice rule package, arguing that it did not raise the broker standard above the current suitability rule. They offered seven modifications that they said would increase investor protection.

"We urge you to acknowledge, before it is too late, that significant improvements and clarificiations are needed for the proposed regulatory package to meet the standard that you have set for it," Barbara Roper, director of investor protection at the Consumer Federation of America, and Christine Lazaro, president of the Public Investors Arbitration Bar Association, and four others wrote in an April 26 letter.


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