August 18, 2019

A New York assemblyman is preparing legislation that will bring the ongoing battle over whether broker-dealers owe a fiduciary duty to their clients to the motherland of the financial services industry.

Jeffrey Dinowitz, a Bronx Democrat, had hoped to introduce the legislation in Albany’s last session but is prepping it for next January, an aide tells RCW. The legislation is modeled on similar laws or regulations already passed or pending in Nevada (IA Watch, Jan. 31, 2019), New Jersey (IA Watch, Jan. 10, 2019), Massachusetts and Maryland.

Give BI a chance

Opponents of the states’ measures have pushed back where the laws or regulations are being considered. A consistent theme in their comments is that state regulators ought to give the SEC’s recently passed Reg BI a chance to take effect (BD Watch, June 5, 2019).

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The Financial Services Institute argued similarly, telling Massachusetts officials that Reg BI and some of the associated, recent reforms (including the Form CRS requirements) achieve "many of the goals” regulators were aiming for in the first place.

Simmering on the back-burner—for now—is the question of whether NSMIA preempts such state moves. SIFMA and the FSI assert the 1996 law does; groups such as the North American Securities Administrators Association disagree.

To preempt or not to preempt

There are voices on each side of the argument who think that, whether NSMIA preempts state actions, the SEC should go farther than Reg BI. “I don’t think Reg BI goes far enough,” says Laura Posner, New Jersey’s former securities bureau chief and a partner at Cohen Milstein Sellers & Toll.

“There are a number of instances in which a broker could simply disclose that they’re not acting in the best interest of an investor and that would be sufficient under the rule, but I don’t think that’s sufficient to protect investors,” states Posner.

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Each side also agrees that, until the Commission or federal courts weigh in, states are likely to continue pushing fiduciary rules for broker-dealers. “This isn’t going to stop with these three or four states,” says Robin Traxler, FSI’s senior VP for policy. “It’s just that there are a lot of different ways that this can come into play,” she adds.

Next steps

In the meanwhile, what are broker-dealers to do? Traxler says industry can help itself by coming up with a lexicon for the upcoming Form CRS. “If you have consistent language and consistent definitions, that’s going to allow more of that side-by-side comparisons that will allow investors to really make an informed choice,” she says.

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Posner says that broker-dealers ought to organize around the most onerous of state regulations, just in case, like the way car makers build their autos to California’s stringent emissions’ standards. It shouldn’t be all that hard, she says. After all, many broker-dealers were already putting infrastructure in place to comply with the aborted Department of Labor fiduciary rules.

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