States Take Own Actions on Fiduciary Standard

Massachusetts became the first state to adopt regulations imposing a fiduciary duty for Broker-Dealers and agents who do business in the state. The regulations remove references to investment advisers and investment adviser representatives who are already subject to a fiduciary duty.

The new regulations went into effect March 6 and will start to be enforced on September 1, 2020. Other states such as New Jersey, Maryland and Nevada are each proposing similar regulations. The states contend the SEC’s Regulation Best Interest (Reg BI) falls short in protecting investors.

Reg BI — the centerpiece of the agency’s advice reform introduced in June 2019 and effective in June 2020 — is designed to raise the bar from existing FINRA suitability standards. It provides significant and material changes to the way brokerage services will be provided and impacts nearly every aspect of a broker-dealer’s operations. Under the SEC rules, investment advisers would continue to be governed by fiduciary duty. Under Reg BI the brokerage industry would not be mandated to work under the SEC Fiduciary Rule which mandates advisors must put client interests first, by law.

Broker-Dealers insist that Reg BI is tough enough and allowing states to do their own thing would create a patchwork of regulations that would substantially increase compliance costs and limit the advice market. In its rule-making package, the SEC did not say whether its regulations should preempt those of individual states.

For more than a decade, regulators have been wrestling with raising investment advice standards. It is likely that the financial industry will challenge these state rules in court, which could set the stage for determining who is the higher authority with regard to advice rules and further ensure that the legal landscape with respect to Broker-Dealer standards of conduct will remain active.

Why is it that the Broker Dealers are fighting the Fiduciary Standard that all Registered Investment Advisors under the SEC have been adhering to for decades and how is that in the client’s best interest?

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