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.
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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.”
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