New fiduciary rules, more lawsuits coming?
Beaten back at the federal level, fiduciary rules are set to make a comeback in some states — but not without a fight there, too.
Nevada and New Jersey are moving forward with their regulatory proposals, though a legislative effort in Maryland stalled. New Jersey’s Bureau of Securities is holding a comment period before finalizing its proposed fiduciary duty, but Wall Street lobbying groups and firms are likely to redouble their efforts to change the rule or halt it altogether, as they have with other fiduciary regulations.
“I would be shocked if we did not see significant attempts to prevent the regulation going into effect. Will that be effective? We don’t know,” says Laura Posner, a partner at law firm Cohen Milstein and a former bureau chief for the New Jersey Bureau of Securities.
Trade groups and firms have already started leveling criticism at state’s rule proposals. And some wealth management executives have questioned whether state regulators and legislators can even take these steps.
“The industry is not convinced it’s legal for each state to have its own standard,” says Raymond James CEO Paul Reilly.
He warns that proposed regulations could increase costs and create a more challenging operating environment for advisors.
“Advisors have clients all over the place and if you have different standards in different states, then it becomes difficult to serve them,” says Reilly, whose firm has more than 7,800 independent and employee advisors.
Should New Jersey enact its fiduciary rule, the implications will range well beyond the state’s borders, according to Adam Antonides, president of independent broker-dealer Cetera.
“A huge number of our advisors have clients in New Jersey,” he says. Cetera has roughly 7,500 advisors.
The situation could get very complicated if more states follow suit. “Image having 50 different standards. Hard to understand how you can operate,” Antonides says.
Their comments reflect criticisms that lobby groups have made.
“State-specific standards will lead to a patchwork of varying requirements across the country, confusing investors and creating uncertainty for advisors who are trying to best serve their clients while also obeying state and federal regulations,” FSI General Counsel David Bellaire said in a statement issued shortly after New Jersey unveiled its proposal.
In a similar vein, SIFMA CEO Ken Bentsen said in a statement the proliferation of fiduciary regulations “at the state level, while well intentioned, will result in a patchwork of conflicting conduct standards.”
State-level fiduciary rules would also increase compliance costs for advisors, trade groups say.
Yet fiduciary advocates and others have argued that the current landscape, in which RIAs are held to a fiduciary standard but broker-dealers are not, is already confusing the investing public.
“When I was bureau chief, a big part of my responsibilities was investor education,” Posner says. “I’d go out and speak to Main Street investors and I would always ask the question, ‘Do you know if you have a broker or an investment advisor? And are they obligated to act in your best interest?’ Uniformly, they all think that they have to act in their best interest. That’s why this rule is so important. There is significant confusion in this space.”
It’s unclear at this point if the brokerage industry’s fiduciary fight would carry over into the courts. But history suggests it could. FSI, SIFMA, the U.S. Chamber of Commerce and other business groups successfully sued the Department of Labor over its fiduciary rule. A federal appeals court vacated the rule in 2018.
Trade groups have urged New Jersey and others to back off and let the SEC take the lead with its proposed Regulation Best Interest, saying they prefer a uniform standard promulgated by their chief regulator. The commission’s proposed Reg BI has met a warmer reception on Wall Street than from investor advocates. The SEC proposal would include new disclosure requirements, but does not impose a fiduciary duty on advisors and brokers.
“I think it’s disingenuous to say they want a uniform standard because I think they want a uniform standard that is the lowest common denominator. When the DoL came out with its fiduciary standard that would have applied across the nation, they were against it,” Posner says.
She adds: “If these organizations are concerned about patchwork laws, then they can just meet the highest standard.”
Criticisms directed at the SEC for not going far enough with Reg BI have likely been a factor in state efforts to craft new fiduciary rules.
Last month, SEC Commissioner Robert Jackson indicated that state regulators could promulgate their own standards.
“We have a federal system and states can do what they feel they need to do to protect investors in their state. Do I think that if we came out with a strong enough Regulation Best Interest that the states would defer to us? I think they might. But that is on us,” Jackson said.
Since then, Wall Street trade groups have asked the SEC to preempt state rules as part of its rulemaking process. That provoked a rebuttal from a group representing state regulators — the North American Securities Administrators Association — who said that process “is the wrong forum for addressing the complex preemption issues.”
“The intersections of federal and state securities laws and the scope of federal preemption of state securities regulatory authority are complex and, in some areas, unsettled,” the NASAA wrote in a letter to the SEC.
The Labor Department, meanwhile, is still working to update its regulations in the wake of the lawsuit that killed the fiduciary rule.