Industry Leader Swings Against State Fiduciary Proposals

April 3, 2019

The Securities and Exchange Commission is likely to adopt its “best interest” rule aimed at upgrading brokers’ responsibility to customers by next summer, but industry leaders who generally support Reg BI complained Thursday that states may intervene with more onerous regulation.

“We don’t want a patchwork of rules,” Ken Bentsen, president of the Securities Industry and Financial Markets Association, said at a press briefing on the trade group’s 2019 priorities. “The states should let the SEC proceed as Congress intended… We would hope that states would pause, let the SEC act [and] figure out how it is going to protect their constituents.”

Sifma is “actively in discussion” with securities regulators in Nevada about a fiduciary rule they are required to implement under legislation the state passed almost 18 months ago, Bentsen said, but noted that other states also have discussed toughening standards following a federal court’s vacating of the Department of Labor’s fiduciary rule last summer.  New Jersey last month held hearings on proposing its own fiduciary rule, and legislators and some regulators in states including Maryland, Minnesota and New York have suggested upgrading standards.

The securities industry’s revived concerns about “blue-sky” state regulations that complement, and sometimes conflict, with federal rules contrasts with its relief over the SEC’s Regulation Best Interest plan.

The proposal relies heavily on disclosure of conflicts to customers as a compliance mechanism, avoids defining the phrase best-interest standard and does not address allowing investors to bring lawsuits for violations—an enforcement mechanism in the DOL fiduciary rule that the securities industry loathed.

State regulators, for their part, appear sympathetic to some of the concerns about multiple layers of regulation.

“Our time is best served in working with the SEC and getting Reg BI to a higher conduct standard,” Mike Pieciak, Vermont’s Department of Financial Regulation commissioner and president of the North American Securities Administrators Association, said in an interview last week.

NASAA has met with the SEC staff twice to discuss tightening its proposal, and written a comment letter that focuses on the inadequacy of mere disclosure to resolve broker-dealers’ and brokers’ conflicts of interest. “There are certain relationships that are too conflicted for disclosure to be sufficient,” he said.

But Pieciak, a former mergers-and-acquisitions lawyer at Skadden, Arps, Slate, Meagher & Flom in New York, expressed sympathy with concerns about overlapping regulation, particularly for smaller broker-dealers and individual registered investment advisers.

Vermont last year adopted a rule requiring broker-dealers and RIAs to have cybersecurity insurance after determining that coverage existed at a reasonable price, but a model cybersecurity rule that NASAA has proposed for its states excludes the requirement. “We don’t want cybersecurity or anything else to become yet another thing that encourages further consolidation in financial services” that reduces customer choice, Pieciak said.

States should tread cautiously about proposing fiduciary standards because of the difficulty in achieving consensus on what they should include and the difficulty of making them work. Nevada regulators should be issuing a fiduciary rule “in the not too-distant future,” he said, but noted that they had not been consulted about the legislation requiring them to propose the regulations.

“It’s a complicated issue for any regulator to attack, let alone for a single state,” he said.

Sifma’s Bentsen, for his part, said the securities industry is eager for passage of the SEC’s Reg BI once the regulator clarifies some concepts that vary from Financial Industry Regulatory Authority rules, such as “materiality,” and gives better guidance on the rule’s mandate to “mitigate or eliminate material conflicts of interest.” SEC Trading and Market Division head Brett Redfearn recently said that the agency intends to be flexible in interpreting the mitigation guidance.

Jim Allen, the chairman and chief executive of Hilliard Lyons and chairman of Sifma, said at the trade group’s update with reporters on Thursday he does not expect the SEC to make “significant modifications” in Reg BI, other than to simplify some of its disclosure requirements.

Originally Published on AdvisorHub
Written by Jed Horowitz & Mason Braswell