AS THE SEC’s “BEST INTEREST” APPROVAL PROCESS ROLLS ALONG, SOME STATES MOVE AHEAD WITH THEIR OWN APPROACHES
Posted on Categories Arbitration

A handful of States are taking matters into their own hands and are moving ahead with uniform fiduciary standard fixes, irrespective of where the SEC will land on its own approach.

As our readers know, the SEC is moving ahead with a uniform fiduciary standard rule, as authorized by Dodd-Frank section 913(g)(1). Specifically, the SEC published in May 2018 three proposals to establish a uniform fiduciary standard: Regulation Best Interests; Standard of Conduct for Investment Advisers; and Form CRS Relationship Summary and Form ADV. Federal Register publication triggered a 90-day public comment period that expired August 7, 2018. The SEC received over 6,000 comments (3,000 of which were unique) on Reg-BI and related materials.

The Commission’s Investor Advisory Committee met in November 2018 and voted 16-3 with one recusal to adopt the recommendations submitted by a majority of the IAC's Investor as Purchaser Subcommittee “to strengthen and clarify” the proposed rules. Next up is consideration of these recommendations by the SEC staff, along with the public comments received and the Committee’s recommendations. This activity by the Commission has not discouraged some States from developing their own fiduciary standard.

Maryland

The Maryland Financial Consumer Protection Commission in January 2019 issued its 2018 Final Report. In the “Recommendations” section starting on page 35, the Report states: “Since SEC and the state insurance regulators (NAIC) have proposed standards that largely preserve the status quo, individual states may need to provide greater protections that investors expect from financial professionals who provide investment advice…. 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 who offers advisory services or holds themselves out as advisors, consultants, or as providing advice, would be held to a fiduciary duty to act in the best interest of the customer without regard to the financial or other interest of the person or firm providing the advice. In addition to broadening the fiduciary duty standard in Maryland to broker-dealers and insurance producers, the fiduciary duty standard currently imposed on investment advisers in Maryland needs to be strengthened, as it is currently weaker than the national fiduciary duty standard.”

Nevada

One State that has already passed legislation is Nevada, which, as we reported in SAA 2017-24, (Jun. 21) enacted Senate Bill 383, a new law establishing a fiduciary standard for brokers and investment advisers operating in the State, effective July 2017. The old law had a fiduciary duty for “financial planners,” but specifically excluded from that term “a broker-dealer, sales representative, investment adviser or representative of an investment adviser.” The new law amended NRS § 628A.010 to eliminate that exclusion, but maintained the exclusion for attorneys, CPAs, and certain insurance producers. The Bill authorized the Securities Division to “adopt regulations concerning such fiduciary duty; providing penalties; and providing other matters properly relating thereto.” It’s taken a while, but the regulatory process is well under way. Specifically, the Nevada Securities Division on January 18th published draft regulations and a request for public comments by March 1st. Although the comment letters are not published on the Division's Website, we are told Nevada will provide copies upon request to fiduciaryduty@sos.nv.gov. We've seen letters on their Websites that PIABA and SIFMA submitted (see SAA 2019-12 for details) and media reports quote Morgan Stanley's letter as threatening to cease supplying brokerage services to Nevada residents, if the fiduciary standards, as written, are adopted.

New Jersey

New Jersey Gov. Phil Murphy announced in September that his administration would pursue a fiduciary regulation for brokers, leading to two public hearings or "conferences" held by the New Jersey Bureau of Securities on November 2 and 19. The purpose of these "conferences" was to draw oral comment on the Bureau's "pre-proposal," floated in October 2018, subsequent to the Murphy announcement, that would make "amendments to [New Jersey's] rules to require that broker-dealers, agents, investment advisers, and investment adviser representatives be subject to a fiduciary duty." A New Jersey Law Journal article, published in late January 2019, summarized some of the submitted comments. The article also indicated that the comment period on the pre-proposal closed on December 14, 2018 and that "the Bureau is currently reviewing the comments received...," with a view to proposing a final rule. At that time, "the public will have an additional 60-day period to comment."

New York

Instead of developing its own version of a fiduciary standard for brokers and investment advisers and risking preemption when the SEC finally acts, New York legislators have taken a different tack. They want investment professionals who are not acting in a fiduciary capacity to disclose it upfront. New York State Bill A2476, "The Investment Transparency Act," would require a disclosure by non-fiduciary brokers and advisers to clients, "at the outset of the relationship," that starts: "I am not a fiduciary. I am not required to act in your best interests...." The most recent action on the Bill was a January 22, 2019 reference to the Judiciary Committee in the State Assembly. A Senate version of the Bill has also been introduced, Senate Bill S2872.

Massachusetts

Commonwealth Secretary William F. Galvin wrote to the SEC, back in 2018 (see SAA 2019-31), as part of the public comments on Reg. BI: “The Commission now has the opportunity of a generation to protect [investors]. Unfortunately, the Proposals are inadequate to provide this protection. I urge the Commission to replace the current Proposals with a strong uniform fiduciary standard, comparable to the standard applicable under the Investment Advisers Act of 1940, that will apply to advice provided to retail investors by both investment advisers and broker-dealers. If the Commission does not adopt a strong and uniform fiduciary standard, Massachusetts will be forced to adopt its own fiduciary standard to protect our citizens from conflicted advice by broker-dealers.” (emphasis added).

(ed: *This subject was the focus of an SER Newsroom report that was prompted by a March 12 news article in a Web publication.)

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