Advisors are adrift in a sea of regulatory changes and the tide keeps rising: Reg BI, Form CRS and now fiduciary rules are resurfacing.
To help wealth managers sort out what’s happening, here’s what the latest milestones mean and what to expect next.
I THOUGHT THE FIDUCIARY RULE WAS DEAD. WHAT GIVES?
It’s making a comeback.
The Department of Labor’s fiduciary rule was kaput,
But, like the many-headed Hydra of legend, one fiduciary rule died to be replaced by three proposals from state regulators in Nevada,
Legislators in Maryland and New York have also voiced interest in enacting similar regulations in those states, though those efforts appear to be on hold.
I DON’T LIVE IN THOSE STATES. WHY SHOULD I CARE?
Should these rules be enacted, their effects will be felt well beyond state lines.
First, the proposals could affect out-of-state advisors serving residents of those states. Are you an advisor in Manhattan serving clients who are residents of New Jersey? Maybe you’re a broker in Florida catering to New Jersey snowbirds? Then you would be wise to follow regulatory developments in the Garden State (and elsewhere), legal experts say.
Firms and trade groups have sought additional clarity from states regulators about the scope of these rules. FSI asked the New Jersey Bureau of Securities what would happen if a resident moved out of the state to another where there is no fiduciary obligation. Would the client’s advisor still be held to the stricter standard?
Many firms have operations in all 50 states, and it could pose managerial headaches to design compliance programs to meet multiple regulatory standards. Morgan Stanley and other brokerages have already indicated they
But while it may be easy to cease operations in a state with 3 million residents (Nevada), the cost will be higher to do so in a state with 9 million (New Jersey) or 19 million residents (New York).
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The regulator disclosed a transformative rule change, sparking outrage among fiduciary advocates and some advisors.
June 12 -
But the new rules may be a boon for some fintech firms.
June 12 -
Concerns arose when the SEC first proposed its package of regulations. Instead of addressing these worries, the agency just codified them.
June 5 -
A group of 11 trade associations plan to ask the state’s securities regulator to reconsider its conduct proposal in light of action by the SEC last week.
June 14
Second, New Jersey could be a fiduciary bellwether.
Should New Jersey’s rule be enacted and survive likely court challenges from Wall Street trade groups, then more states may be emboldened to copy it. Massachusetts has already modeled its proposal after New Jersey’s regulation, legal experts note.
“This would not be the first time that states have put together model rules,” says Laura Posner, a partner at law firm Cohen Milstein and a former bureau chief of the New Jersey Bureau of Securities. “That’s what NASAA does. It puts together model rules so that states can adopt them and have uniformity.”
And there may be an upside to a copy-cat approach in that the industry would not have to develop state-by-state compliance, says George Gerstein, co-chair of fiduciary governance at Stradley Ronon.
“To the extent that we can’t have our first choice, namely follow federal rules and be done with it, then yes, if we start to see states come out with identical proposals, it could simplify things,” Gerstein says. “It’s not 50 different approaches, [though] you’d still have to dig into it and be comfortable that you could satisfy it.”
HOW DOES THIS DIFFER FROM REG BI?
These rule proposals are much stricter than current standards of conduct for brokers.
“They are a fiduciary standard and there are real interpretative questions around proprietary products, transaction-based compensation, [and] how you can do that and still satisfy the regulation,” Gerstein says.
The SEC’s Regulation Best Interest may use similar terminology as a fiduciary rule, but it is a lesser standard that relies heavily on disclosure. Indeed, though
The state proposals require mitigation of conflicts of interest and cannot be satisfied simply through disclosure of conflicts of interest.
“That is a pretty significant change compared to Reg BI,” Gerstein says.
FSI in fact asked New Jersey’s regulator to consider adding a provision “that explicitly states that a broker-dealer’s (or agent’s) duty of loyalty is satisfied by disclosing ‘all material conflicts of interest that are associated with a recommendation.’”
IS THAT ALL?
Nope.
The 83,000 investment professionals who hold CFP credentials must get ready for the CFP Board’s
Some brokerages oppose the new standards. Advisors at Edwards Jones
The 17,000-advisor firm said it was evaluating the situation. “We continue to have discussions with the CFP leadership, but we have made no decision with respect to the CFP’s implementation date,” an Edward Jones spokesman said.
WHAT’S NEXT ON THE STATE FRONT?
Hearings, then likely legal challenges.
Massachusetts is taking public feedback on its proposal until July 26. New Jersey has extended its public comment period and will hold hearings July 17 to solicit additional input. Regulators will then evaluate whether to make changes to their proposals and whether to enact them.
If the Labor Department’s saga is any indication, expect fierce opposition to these regulations.
The department was forced to fend off several lawsuits against its fiduciary rule, including the one that ultimately killed it. State regulators will likely face similar legal challenges, principally around arguments that federal regulations should preempt state rulemakings in this area and that state fiduciary laws violate a federal bookkeeping requirements.
Several industry trade groups already asked the SEC to weigh in on the matter. The commission has so far declined to do so.
“I think it’s highly likely that industry groups will try to challenge the law, but what the SEC does may drive the success of those suits,” Posner says.
FSI, meanwhile, indicated it believes New Jersey’s proposal would violate federal law because the rule would require broker-dealers to “keep records that document and demonstrate why their recommendations are the ‘best of the reasonably available options.’”
Advisors should also anticipate hearing anti- and pro-fiduciary arguments that were leveled against or in support of the Labor Department’s rule.
The American Securities Association told
Advisors will find out what regulators make of those arguments later this summer.