The threat posed by state fiduciary rules

A state-by-state approach to fiduciary standards would create a confusing and counterproductive regulatory patchwork that would impede advisers' ability to provide guidance

Sep 10, 2019 @ 3:49 pm

By Dale Brown

With Regulation Best Interest finalized and moving toward implementation, independent financial firms and advisers are coming together to make the new rule's common standard of care a reality. Although many questions remain, the Financial Services Institute is pleased that our profession has embraced Reg BI and is gathering significant momentum toward compliance.

At the same time, unfortunately, disparate fiduciary proposals in the states threaten to undermine this momentum.

A recent case in point provides a stark example. In July, we submitted a letter in response to the Massachusetts Secretary of the Commonwealth's request for comment on a fiduciary standard of conduct for advisers and firms in that state.

As we have said many times, a state-by-state approach to fiduciary standards would create a confusing and counterproductive regulatory patchwork that would severely impede advisers' ability to provide guidance to investors – and the Massachusetts proposal provides perhaps the best evidence yet as to why.

[Recommended video: Valerie Brown discusses the SEC advice rule and why it should preempt state efforts]

Among other new measures, the proposal would create a presumption that advisers had breached their duty to clients in cases where the adviser recommended an investment or strategy that was not the "best of the reasonably available options" for the client.

This sounds like an admirable goal, since advisers' objective is to always make the best recommendation possible based on available information.

The first problem, of course, is that it's impossible to determine the "best available" investment option without the benefit of hindsight. Since no one can predict investment performance with 100% certainty, it's also impossible to consistently identify the "best available" investment option.

The second problem is that the proposal does not provide clear standards for compliance. It leaves open key questions such as who will determine what the "best" recommendation should have been given the information available at the time, or what standards that person or office would use to make that judgement.

With its overly ambitious approach to enforcing a "best possible recommendation" requirement, the Massachusetts proposal would deviate drastically from other fiduciary proposals and make it nearly impossible for advisers to fulfill their crucial function of guiding investors – ironically making it more difficult for Massachusetts clients to obtain advice that serves their best interests.

FSI firmly believes that Reg BI represents a better approach to placing clients' best interests first and foremost, and we're backing up this belief with action.

In September, we will host our first Reg BI Workshop for member firms, with the goal of helping our members smoothly implement Reg BI, while also making the process of comparing firms' offerings easier and more transparent for investors.

We will provide attendees with a free Reg BI Compliance Guide and will host discussions on the implications and implementation challenges involved with the rule.

While state fiduciary proposals unfortunately continue to create new hurdles in the drive to establish a common standard of care, FSI and our members are proactively working to build momentum in implementing a better approach under Reg BI.

[More: It's time to end 'rulemaking by enforcement']

Dale Brown is president and CEO of the Financial Services Institute.


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