State-Based Fiduciary Standards

Even before the Department of Labor (DOL) signaled under President Donald Trump that it would not be defending the Obama-era DOL fiduciary rule expansion—which was vacated in mid-2018 by a U.S. circuit court—a number of state governments had already begun the process of implementing their own conflict-of-interest rules for financial advisers and broker/dealers (B/Ds).

But the surprise court defeat of the DOL fiduciary rule, which would have greatly expanded the number of advisers considered to be fiduciaries under the Employee Retirement Income Security Act (ERISA), accelerated such state-based efforts and has led to more states pushing to fill a perceived void created by federal deregulation.

According to written commentary shared by attorneys with Stradley Ronon, regulators and legislators in Maryland, Nevada, New Jersey and New York, among others, are currently implementing stricter standards for advisers and brokers operating in their respective jurisdictions.

One of the newest efforts kicked off this past October 15, when the New Jersey Bureau of Securities issued a notice of pre-proposal to solicit comments on whether to adopt rule amendments that would require broker/dealers, sales agents, investment advisers and investment adviser representatives to be subject to “an express fiduciary duty.” The New Jersey notice highlighted concerns that investors are “often unaware of whether and to what extent those they trust to make financial recommendations are receiving undisclosed financial benefits in exchange for steering their clients to certain products.”

According to Stradley Ronon attorneys, the pre-proposal did not include specific rule language, but the bureau did indicate it was considering “making it a dishonest or unethical business practice for failing to act in accordance with a fiduciary duty when recommending to a customer an investment strategy or the purchase, sale or exchange of any security or securities, or providing investment advisory services to a customer.”

State Timelines May Shift This Year

Generally speaking, state-based fiduciary rule implementation timelines across the U.S. could be either extended or accelerated this year, depending on if and when the Securities and Exchange Commission (SEC) finalizes its own advisory standards reform effort. Last April, the SEC released a “Regulation Best Interest” proposal aimed at creating a unified conflict of interest mitigation standard for all brokers and advisers—not just those working under ERISA. During a recent speech, SEC Chairman Jay Clayton said the investment market regulator has made it a priority to finish work on its Regulation Best Interest proposal this year.

Another factor that could affect states’ timelines, according to Stradley Ronon attorneys, is that state legislatures that were reshaped to favor Democrats in the 2018 elections could choose to move faster in the direction of strengthening conflict-of-interest regulations. As an example, they point to New York Assemblyman Jeffrey Dinowitz and his previous, unsuccessful introduction of the Investment Transparency Act.