After a strong electoral showing for Democrats, more states could move forward with proposals for tougher regulation of advisors. But any rollout of new fiduciary proposals will more likely be a trickle rather than a torrent.
"I think any potential tsunami wave of state fiduciary legislation crashed election night when the Democrats failed to meet some of their more aggressive goals," says Duane Thompson, senior policy analyst at fi360, a fiduciary training firm. "No question it was a good night for the party, but while Democrats won a number of governorships and full control of several state legislatures Tuesday night, I don't think it is enough to cause a tidal wave of state fiduciary legislation next year."
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October 31
A push for strong fiduciary protections at the state level followed the collapse of the Department of Labor's rule covering retirement accounts. Nevada has enacted a stringent law requiring brokers and advisors to act as fiduciaries. Other states, including New York, Connecticut and New Jersey, have been considering proposals to set new disclosure provisions for advisors regarding their fiduciary status and conflicts of interest.
New Jersey went a step further in September, when Gov. Phil Murphy, a Democrat, announced a proposal for a uniform fiduciary standard that would be undertaken by executive action, rather than through a bill passed by the legislature.
Proposals like New Jersey's have rattled some industry groups, including the Financial Services Institute, which worries about saddling advisors with additional layers of regulations.
"For states, such as New Jersey, that are looking to create a state-specific fiduciary standard, we express concern that these 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," Michelle Carroll Foster, FSI's vice president of state affairs, writes in an email.
In New York, the backer of a bill to require non-fiduciary advisors to provide a "plain-language" disclosure stating that they are not requiring to act in their clients' best interests is hoping that last night's strong showing for Democrats will build momentum for the proposal.
Assemblyman Jeffrey Dinowitz of the Bronx is planning to re-propose the Investment Transparency Act in the next session of the legislature. At that time he hopes to find support for a companion measure in the state Senate, which Democrats retook last night for the first time since 2010.
"For the last few years the Republican majority in the state Senate has stonewalled this consumer-friendly legislation," Dinowitz writes in an email. "It is my hope that with the new majority in the Senate we can finally pass the Investment Transparency Act."
Dinowitz's office confirms that it will be looking for a sponsor in the Senate. The office acknowledges there has been considerable opposition from some quarters of the wealth management industry.
The bill would require this blunt disclosure of non-fiduciary advisors:
"I am not a fiduciary. Therefore, I am not required to act in your best interests, and am allowed to recommend investments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks and expected returns for you."
Dinowitz blasts the federal government for abandoning the Labor Department’s fiduciary rule, and argues that in the absence of federal investor protections, "it is time for the states to do what we can do take some of the confusion out of investing."
But even if New York, now solidly blue, moves ahead with that measure, it is not likely to set in motion a cascade of other states following suit, according to Thompson. And it is even less likely that states will follow Nevada's example and embrace a full uniform fiduciary standard.
"That said, where there is Democratic control of both chambers and the governor's office – states like Colorado, New Mexico, Illinois and New York come to mind — it's always possible that you will see fiduciary-related legislation introduced," Thompson says.
