NASAA wants to limit who can call themselves 'advisors'

State regulators are considering new restrictions that would prevent just anyone in the financial services industry from taking on the label "advisor." And they're also proposing a new best interest conduct standard similar to the one that now applies to broker-dealers at the federal level.

But before they adopt anything, they want to hear what the industry has to say. The North American Securities Administrators Association, a group representing state industry watchdogs, is giving the public until Dec. 19 to comment on proposed changes to a business practices rule meant to curtail "dishonest or unethical business practices of broker-dealers and agents."

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One of the proposal's provisions would prevent financial professionals from calling themselves "advisors" or "advisers" without being registered as investment advisors or investment advisor representatives at the state level or with the federal Securities and Exchange Commission. NASAA said in a previous report on the proposal that it's trying to prevent confusion in the public mind between wealth managers who are operating as brokers and those operating as advisors.

Brokers often collect commissions and other payments for completing one-off transactions on behalf of clients, whereas advisors typically collect fees generally thought to be more aligned with investors' interests. Advisors are held to a fiduciary conduct standard obliging them always to put their clients first and eliminate conflicts of interest.

Groups like the Financial Planning Association have long argued for what they call "title protection" for financial advisors. With virtually anyone now free to adopt the "advisor" label, the FPA has argued, the public can have a hard time discerning who the professionals are with actual expertise. 

A second part of the proposal would allow state regulators to impose on broker-dealers the same sort of requirements that the federal authorities can through the Regulation Best Interest conduct standard. Reg BI, adopted in June 2019, calls on brokers to look out for their clients' interests and, at a minimum, disclose conflicts.

This part of the proposal had initially incurred strong resistance from industry representatives, who warned that certain provisions would go far beyond the restrictions laid out in Reg BI. Among other things, critics warned the original version could have banned almost all forms of broker-dealer compensation, save for commissions. They worried that the proposal could make any sort of statement about investment options — including advertisements — a recommendation that triggers brokers' obligation to look out for clients' best interests. 

Mark Quinn, the director of regulatory affairs at the independent broker-dealer network Cetera and a critic of the original proposal, said the new revision marks a "vast improvement."

"Most of the problematic proposals in the prior version, they took all of that out," Quinn said. "I think there are still a few open questions at the margin, but they are much less substantive. On balance, this is a very positive development."

NASAA's proposal is technically a "model rule" that state governments will be free to adopt individually if they see fit. NASAA's current business practices rule, first put forward in 1983, is now in effect in some form or other in all 50 states.

NASAA amended in 2022 to enable states to sanction brokers who fail to pay sanctions or monetary penalties. But those changes included nothing related to Reg BI.

Anyone wishing to weigh in on the proposal should send comments in the next 44 days to nasaacomments@nasaa.org. The results will eventually be posted to NASAA's website.