Fierce opposition greets states’ fiduciary proposals

March 28, 2019 1:12 PM

“Significantly drive up compliance costs.” “Affect clients adversely.”

These are just some concerns broker-dealers, financial advisors and trade groups have about Nevada and Maryland’s initiatives to impose uniform fiduciary standards.

Their main worry: A patchwork of state regulations could eliminate access to low-cost, transactional brokerage services, or increase firms’ costs related to meeting the rules. The opposition comes as the SEC deliberates its Regulation Best Interest proposal, causing some to fear that states’ proposals could needlessly compete with or complicate federal regulations, should they come to pass. Fiduciary proponents dispute that and counter that these regulations constitute necessary investor protections.

There are already too many regulations, says Don Moore, an advisor at Chesapeake Financial Services. Others are concerned the proposals could backfire against the consumers they are designed to protect.

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“This bill may affect us adversely, but it will affect our clients much more adversely,” said Mark Quinn, director of regulatory affairs at Cetera, at a Maryland General Assembly hearing on March 13th. He added that his firm operates as a BD and an RIA because customers demand the choice.

More than 25 advisors, firms, and advocacy groups appeared at the Maryland hearing in opposition to the state’s proposal. Approximately 20 firms and trade organizations have filed responses to the Nevada state secretary opposing its calls for a statewide fiduciary duty. Only four advisors and trade associations were supportive of the proposals at the Maryland legislative hearing, and fewer than five responded favorably to the Nevada state secretary’s request for comment.

Scroll through to see a sampling of the feedback culled from the Maryland General Assembly hearing, open letters to the Nevada state secretary, as well as Tweets, and public statements from advisors and others.

A better way

“We certainly know how important it is ... to have [Maryland investors’] best interests at heart. This fiduciary provision is not the way to do it. I just want to highlight what the SEC is doing. They expect to have a ruling by the end of the summer, which includes a robust standard of conduct that will raise the standard owed to me and other investors in Maryland. It includes a requirement to mitigate or eliminate material conflicts of interests. Mere disclosure will not be enough, as under this proposed [state] regulation. The SEC’s proposal also requires BDs to exercise reasonable diligence, care, skill and prudence while making decisions.”

SIFMA
Lisa Bleier
Associate general counsel
From the Maryland General Assembly hearing

Taking services out of reach

“The provision would significantly drive up compliance costs for firms. At some point those firms’ costs would have to be passed on to investors, taking access and choice of advice out of the reach of Main Street Americans.”

Financial Services Institute
Dale Brown
President
From the Maryland General Assembly hearing

What about consumer choice?

“We believe it’s critical to ensure standards in a way that preserves consumer choice and access to the products and services people need. Within the context of a broader national debate, we are not asking Maryland to stand down, but believe a uniform strategy would be a better direction.”

Insured Retirement Institute
Jason Berkowitz
Counsel, Regulatory Affairs
From the Maryland General Assembly hearing

Increasing costs and disincentives

“The patchwork of state and soon-to-be federal standards is going to increase costs and create disincentives for financial advisors serving customers in the state.”

The Investment Program Association
Anya Coverman
Director of government affairs
From the Maryland General Assembly hearing

Poorly defined

“It is truly astonishing to me the breadth of authority that is sought to be granted to the Maryland Attorney General and Securities Commission under this bill, by using the term ‘fiduciary duty.’ A term that has different applications in different legal settings. Another striking thing about the language of this bill is that there are absolutely no guidelines from the legislature to the regulators. We request the fiduciary amendments be removed from the bill.”

NAIFA-Maryland
Bryson Popham
Lobbyist
From the Maryland General Assembly hearing

'I can’t keep up'

“Our clients, in many cases, are three generational… It’s very easy to manage portfolios when we’ve had the whole family. My concern is that ... it will be very difficult to manage these family portfolios, and I don’t want to decouple one part of the family unit because I can’t keep up with all the regulations of each individual state having their own responsibilities.”

Chesapeake Financial Services
Don Moore
Advisor
From the Maryland General Assembly hearing

It hurts the underserved

“I wanted to share a quick story about the impact the potential legislation could have: One of my clients called me this morning, who is a small business owner, who owns an alarm company with 18 employees, and asked me to come in today to meet with two new installation technicians to talk about retirement planning. So I went in there. … When I go into these meetings, it’s often the only time when employees like that have the ability to talk with a qualified financial advisor, to talk about whatever it is they want to talk about. If I’m held to a fiduciary standard, I will no longer be able to do that without charging a fee. The reality is these technicians will not pay a fee, because they cannot afford to pay a fee. And if I’m not able to speak to them, they will not be able to plan for retirement. It will be out-of-sight-out-of-mind. And they will continue to be part of that grossly underserved market that could potentially continue to grow, with this bill.”

Franklin Financial Group
Willie Franklin
Advisor
From the Maryland General Assembly hearing

Adverse effects

“One size does not fit all. The practical effect of creating a fiduciary duty for BDs that is the same for RIAs would be to restrict choice for consumers. The reason we operate as both BDs and RIAs is because consumers desire choice. This bill may affect us adversely, but it will affect our clients much more adversely.”

Cetera
Mark Quinn
Director of regulatory affairs
From the Maryland General Assembly hearing

It’s just not workable

“The data breach policy, if passed, would be the most restrictive data breach law in the country. It makes dramatic changes to the notice periods that breached businesses have to make to affected consumers. Quite frankly, they’re just not workable. We have grave concerns about that.”

SIFMA
Chris DiPietro
Lobbyist
From the Maryland General Assembly hearing

Inconsistent and conflicting patchwork of rules

“I believe we need to have a national standard, not a patchwork of inconsistent and possibly conflicting state rules. As a firm we have already decided not to take clients from Nevada, because of the uncertainty we’ve already seen there. If we see this patchwork continue, we’re going to have to make tough decisions going forward.

“In my experience, lower and middle income clients overwhelmingly use the services of BDs to get personalized investment advice, because that model only pays if there is a transaction. For small buy-and-hold investors, we believe this is the right approach.

“We have 6,800 accounts in Maryland, and 5,500 of those accounts are regarded as smaller. We’ve determined it’s going to be harder to serve these small accounts in light of these uncertain added costs and risks. Let the SEC continue with its work.”

Synergy Financial Group
Larry Leitch
Advisor
From the Maryland General Assembly hearing

Investor and advisor confusion

“We believe a national standard provides enhanced investor protection, avoids investor confusion, and is much easier to administer and operationalize than an uneven patchwork of state laws. … It would also introduce a new level of investor confusion, which would undercut not only the new, uniform federal standard, but also the interest of investor protection generally… It would also introduce a new level of investor confusion, which would undercut not only the new, uniform federal standard, but also the interest of investor protection generally.”

SIFMA
Kevin Carroll
Associate general counsel
From a comment letter to the Nevada Secretary of State

Cutting out the smaller investors

“The likely result of the adoption of the strict fiduciary duty found in the draft regulations — along with the responsibilities and increased operating costs that would accompany such a duty — would be that many financial professionals would no longer serve clients with modest or moderate means. This would be one consequence of the movement by many firms from a commission-based business model to a fee-based model that goes hand-in-hand with the adoption of a strict fiduciary duty standard.”

NAIFA and NAIFA-Nevada

Donna Tatro Saarem
President, NAIFA-Nevada

Gary A. Sanders
Vice president of government relations, NAIFA
From a comment letter to the Nevada Secretary of State

'Most retail investors think that their individual financial advisor is a fiduciary'

“The importance of a fiduciary standard is borne out by the fact that most retail customers do not understand the differences between investment advisers, who are subject to a fiduciary standard under federal law, and brokerage firms, who are not. In fact, most retail investors think that their individual financial advisor is a fiduciary —regardless of whether that person is a representative of a brokerage firm or an investment advisory firm. The industry is well aware of this confusion. In a survey open to all brokers, investment advisers and insurance consultants and producers, 97% of them said: investors don’t understand the differences between brokers and investment advisers.”

Public Investors Arbitration Bar Association
Christine Lazaro
President
From a comment letter to the Nevada Secretary of State

States do not have the authority to override the SEC

“States may investigate and bring enforcement actions with regard to fraud and deceit against SEC advisers, but they may not regulate the conduct of SEC advisers.”

Investment Adviser Association
Gail Bernstein
General counsel
From a comment letter to the Nevada Secretary of State

Operations between states will become costly

“Many financial professionals operate in multiple states. To comply with various and potentially conflicting state and federal standards, firms will have substantial operational costs (legal, personnel, technology/systems) in order to ensure compliance with multiple standards. These costs will have a direct impact on the availability and cost of financial advice for investors in Nevada.“

Institute for Portfolio Alternatives
Anthony Chereso
President
From a comment letter to the Nevada Secretary of State

Firms brought this on themselves

“States see through the fake fiduciary standard the SEC proposed and are considering stronger measures. Industry groups brought this on themselves when they lobbied for a weak federal standard that doesn't protect investors or end abusive practices.”

Consumer Federation of America
Barbara Roper
Director of investor protection
From Twitter regarding the proposed legislation in Nevada