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States’ rescue of fiduciary rule could backfire

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For supporters of the fiduciary rule, state regulators’ efforts to craft their own fiduciary standards, in response to the Trump administration’s desire to weaken them, could be a mixed blessing.

“As a financial planner, I would not be excited about the complexity of a patchwork of state regulations,” says Scott Beaudin, a CPA, CFP and chairman of NAPFA. “Ideally, you would have a federal solution.”

Plans by states such as Nevada to increase fiduciary protections may put new pressure on the Trump administration not to tinker too much with the Department of Labor’s fiduciary rule. But should states ultimately act, advisors would face a new layer of “administrative complexity,” Beaudin says.

NAPFA, like the CFP Board and FPA, has supported the Labor Department’s fiduciary rule.

The department recently moved to delay implementing the regulation’s remaining elements, which include an enforcement mechanism, to July 2019 from January 2018. The agency is conducting a review of the regulation with an eye toward rescinding it in whole or part, as ordered by President Trump earlier this year.

Despite those moves, Beaudin says his organization remains optimistic about the rule’s fate. He cautioned, however, that there is a risk of a “void in fiduciary regulation generally.”

“If DoL is repealed, that would encourage states to act,” says the advisor, who is based in South Burlington, Vermont.

Nevada’s government acted in June, passing a law that will expand the number of financial planners subject to a fiduciary standard. Though the securities division of Nevada’s Office of the Secretary of State will host a workshop on October 6 to solicit public feedback on the law, the new regulation has already elicited industry criticism.

SIFMA and several other business groups, for example, have written to Nevada’s regulatory authorities to assert that the new rules risk overlap with other regulators’ actions.

“We think there should be one standard across the board,” says Kim Chamberlain, associate general counsel at SIFMA. “A single standard would be easiest for everyone to understand from a compliance perspective, but also from a client’s perspective.”

The impact of a hodgepodge of regulations would perhaps be more complex than what would happen if one state were to adopt a fiduciary standard but its neighbor didn’t, according to Bruce Ashton, partner in the employee benefits and executive compensation practice group at the law firm Drinker Biddle.

“What if California has a law and Colorado has a law, but they’re not the same?” Ashton asks. “How do you deal with that as a national firm?”

He suggests that states could adopt a position that firms and advisors are deemed in compliance if they meet the federal standard, rather than a state’s. Still, Ashton says, it could make compliance for national firms “very complicated and expensive.”

It’s unclear if potential state fiduciary regulations would face lawsuits from industry trade groups. SIFMA, the U.S. Chamber of Commerce and others filed similar suits against the Labor Department over its fiduciary rule

Indeed, the department’s regulation has been subject to almost ceaseless back-and-forth struggles since a version of it was first proposed by the Obama administration in 2010. The regulation has been subject to lawsuits as well as attacks by Republican lawmakers in Congress.

Rep. Ann Wagner (R-Mo.) recently said she would introduce new legislation to kill the rule. Similar attempts last year faced an almost certain veto from then-President Obama.

“I’ve been at this for five years now,” Wagner says. “I believe we will get there, and I believe we have the administration’s support.”

Outright repeal of the regulation has not proved easy. Meanwhile, fiduciary supporters have been pushing back, and doing so vocally. When the Labor Department sought public feedback on a proposed initial delay, it received about 193,000 comments, of which nearly 178,000 expressed opposition to any delay. Sen. Elizabeth Warren (D-Mass.) and other Democrats have also upped their rhetoric around preserving the regulation.

Still, momentum is with the rule’s opponents, who recently notched a victory with the Labor Department’s proposal to delay implementation of the rule’s remaining provisions for 18 months.

“State legislation enforcing true fiduciary duties is not preferable; today, however, it beats the alternatives,” says Knut Rostad, president of the Institute for the Fiduciary Standard.

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