On Fiduciary Reform, Some Large States Pushing Ahead; Others Posture, With Eye on SEC Proposal
June 5, 2018 by Rich Blake
Time has all but run out on the Department of Labor’s fiduciary rule. Should the DOL fail to petition the U.S. Supreme Court by a June 13 deadline (no one expects the agency to do so), its effort to federally regulate financial-advice-giving conduct standards will become nullified. The investment-advice standard that the Securities and Exchange Commission is poised to set now takes center stage — or so it would seem.
However, some states are trying to correct what they see as regulatory blind spots. From Albany to Sacramento, states have moved, or are moving, forward with agency rulemakings and state legislative initiatives, potentially leading to a proverbial patchwork quilt of fiduciary standards.
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Not surprisingly, New York and California are on the front lines. A few weeks ago, attorneys general from the two mega states, along with Oregon and the American Association of Retired Persons, endeavored unsuccessfully to revive the defense of the DOL rule. In broker-teeming New York, the fight to enforce higher standards for registered reps continues in earnest.
New York: Annuities Targeted
Legislative efforts to bolster fiduciary standards appear to be in a holding pattern, but the New York State Department of Financial Services is moving forward with a revised best-interest regulation that would apply to annuities and life insurance, effective March 1, 2019. It would be among the strictest rule sets in the country, requiring brokers to disclose all suitability considerations and product information that form the basis of any recommendation. Furthermore, brokers could only make a recommendation if they have a reasonable basis to believe that the consumer can meet the financial obligations. And unless the broker is a Certified Financial Planner, they are prohibited from telling a consumer that a recommendation is part of financial planning, investment advice or related services. As mentioned, legislative efforts in the Empire State seem to be in limbo as the SEC moves ahead with its proposed reform package (its public comment deadline is August 7). About one year ago, the New York Assembly introduced a bill requiring a disclaimer of fiduciary status by non-fiduciary advisors. It remains in committee.
Garden State Variety
In New Jersey, a similar legislative initiative is, likewise, stranded in committee. In fact, there are two identical Democratic-representative-sponsored bills, one in the Assembly and one in the Senate. They would require “non-fiduciary advisors” — defined as anyone who uses, in self-identification, any term that is suggestive of investment, financial, retirement planning knowledge or expertise — to disclose that the relationship is not considered to be of a fiduciary nature. “I am not a fiduciary,” reads the proposed and rather unambiguous disclaimer language. “Therefore I am not allowed to act in your best interests. And I’m allowed to recommend investments that may earn me higher fees.”
In Illinois, yet another disclosure-focused bill has been introduced and then held up in committee while the SEC takes the lead on advisor regulation.
Massachusetts Muscles
Not to be outdone in the realm of financial consumer protection, Massachusetts this past February took enforcement action against Scottrade. The widely followed case, brought by the Massachusetts Secretary of the Commonwealth, was partly based on Scottrade’s alleged violations of procedures it had put in place to comply with parts of the DoL rule that have already been implemented.
Meanwhile, in Maryland, the Senate there approved a bill that included a provision instructing the Maryland Financial Consumer Protection Commission to study the outcome of federal efforts to raise fiduciary standards and then determine whether to enact its own law. Maryland, as with other states, is letting the SEC have right of way.
Presently, four states — California, Missouri, South Carolina and South Dakota – have imposed fiduciary standards on brokers, and they have held up in court. But in 14 other states, courts have ruled the relationship between brokers and clients is not considered a fiduciary one.
And in Connecticut there’s a measure that, while sharply focused on its public pension fund stewards, does suggest a willingness to take up fiduciary matters. As of October 1, 2017, administrators involved with state-run retirement assets must disclose fees paid to investment advisors.
