The state-level fight against Reg BI

July 26, 2019 by Kelton Corcoran

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Kelton Corcoran

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Kelton Corcoran is a content marketing specialist at Advicent, the financial planning technology provider of choice for nearly 100,000 financial professionals.

It has now been nearly two months since the Securities and Exchange Commission officially passed a new regulatory standard applying to broker-dealers: the Regulation Best Interest rule (Reg BI). The rule strengthens the standards previously set forth by the suitability rule and hopes to bring broker-dealers in closer regulatory competition with Registered Investment Advisors (RIAs).

Since the rule was passed, debate has ensued on whether Reg BI imposes strong enough standards on broker-dealers. This has led several states to mount a challenge against Reg BI in hopes to establish a more rigid set of rules similar to those that were previously outlined under the Department of Labor’s (DOL) fiduciary rule. Here is where those challengers currently stand in their race to increased regulation.

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Massachusetts

The most recent state to formally seek stronger regulation is Massachusetts, with a proposal on June 14 from its Secretary of State William Galvin – the state’s top securities regulator. In response to the SEC’s Reg BI rule, Galvin said “We are proposing this standard because the SEC has failed to provide investors with the protections they need against conflicts of interest in the financial industry, with its recent ‘Regulation Best Interest’ rule. My office has seen firsthand the serious financial harm that investors and savers have suffered as a result of conflicted financial advice.”

Massachusetts’ proposal is the first to have taken place following Reg BI, and the deadline for public comment ends today, July 26.

New Jersey

New Jersey’s own proposed fiduciary rule was met with such heavy resistance that it pushed back the public comment deadline by more than a month to sort through the counter-arguments to the proposal. Originally expected to move towards a final ruling after closing for public on June 14, New Jersey extended the deadline to July 18 to include a public hearing that was held on Wednesday, July 17.

Reports from the hearing were that brokerage industry representatives were out in mass numbers and further expressed their opposition to the proposed rule. Those opposed to the rule claimed that imposing such regulations could drive costs for investors upwards and risk ostracizing investment access to the same consumers that New Jersey is hoping to help. Rather than immediately enacting a fiduciary standard, the opposition urged state officials to give the new Reg BI rule a chance.

Following the closure of the public comment period, New Jersey is expected to release a finalized decision sometime this fall.

Nevada

Nevada was the first state on this list to take action with its own fiduciary rule proposal, which came on January 18, 2019. Brought to light by the Nevada Securities Division, the rule set the stage for this trend of states fighting for tighter regulation. Similar to the DOL’s prior rule, it would apply a uniform standard across the Nevada financial services industry and be equally enforced on both brokers and advisors.

The proposal was met with heavy resistance from firms offering brokerage services in the state, who threatened to cut back investment offerings in Nevada should the proposal be approved.
The public comment period for Nevada’s proposal ended on March 1, 2019, and there has yet to be a final ruling made.

Maryland

Just two weeks following Nevada’s proposal, Maryland Senator Jim Rosapepe introduced the Financial Consumer Protection Act of 2019 that aimed to establish “broker-dealers, broker-dealer agents, insurance producers, investment advisors, federally covered advisors and investment advisor representatives” as fiduciaries.

Following its introduction on February 4, 2019, the proposal was put to a vote and rejected by the Maryland Senate Finance Committee on April 3, 2019.

New York

New York Assemblyman Jeffrey Dinowitz first introduced the Investment Transparency Act in January of 2017 that would require brokers and other non-fiduciary financial advisors to disclose to their clients that they do not have to act in their client’s best interest. The act did not pass but was since reintroduced on January 22, 2019.

New York’s effort is weaker compared to the fiduciary hopes of the other states listed above, and there is question on how it will play out following the introduction of Reg BI, which requires a document called Form CRS. The document’s purpose is to summarize information about a firm’s services, fees and costs, conflicts of interest, legal standard of conduct, and whether the firm and its professionals have had a disciplinary history. These details bear some similarity to the disclosure goal of the Investment Transparency Act.

As of today, the act is listed as “in assembly committee” on the New York State Senate website but has not seen movement since Reg BI’s introduction.

It has now been nearly two months since the Securities and Exchange commission officially passed a new regulatory standard applying to broker-dealers: the Regulation Best Interest rule (Reg BI). The rule strengthens the standards previously set forth by the suitability rule and hopes to bring broker-dealers in closer regulatory competition with Registered Investment Advisors (RIAs).
Since the rule was passed, debate has ensued on whether Reg BI imposes strong enough standards on broker-dealers. This has led several states to mount a challenge against Reg BI in hopes to establish a more rigid set of rules similar to those that were previously outlined under the Department of Labor’s (DOL) fiduciary rule. Here is where those challengers currently stand in their race to increased regulation.
Massachusetts
The most recent state to formally seek stronger regulation is Massachusetts, with a proposal  on June 14 from its Secretary of State William Galvin – the state’s top securities regulator. In response to the SEC’s Reg BI rule, Galvin said “We are proposing this standard because the SEC has failed to provide investors with the protections they need against conflicts of interest in the financial industry, with its recent ‘Regulation Best Interest’ rule. My office has seen firsthand the serious financial harm that investors and savers have suffered as a result of conflicted financial advice.”
Massachusetts’ proposal is the first to have taken place following Reg BI, and the deadline for public comment ends today, July 26.
New Jersey
New Jersey’s own proposed fiduciary rule  was met with such heavy resistance that it pushed back the public comment deadline by more than a month to sort through the counter-arguments to the proposal. Originally expected to move towards a final ruling after closing for public on June 14, New Jersey extended the deadline to July 18 to include a public hearing that was held on Wednesday, July 17.
Reports from the hearing were that brokerage industry representatives were out in mass numbers and further expressed their opposition to the proposed rule. Those opposed to the rule claimed that imposing such regulations could drive costs for investors upwards and risk ostracizing investment access to the same consumers that New Jersey is hoping to help. Rather than immediately enacting a fiduciary standard, the opposition urged state officials to give the new Reg BI rule a chance.
Following the closure of the public comment period, New Jersey is expected to release a finalized decision sometime this fall.
Nevada
Nevada was the first state on this list to take action with its own fiduciary rule proposal , which came on January 18, 2019. Brought to light by the Nevada Securities Division, the rule set the stage for this trend of states fighting for tighter regulation. Similar to the DOL’s prior rule, it would apply a uniform standard across the Nevada financial services industry and be equally enforced on both brokers and advisors.
The proposal was met with heavy resistance from firms offering brokerage services in the state, who threatened to cut back investment offerings in Nevada should the proposal be approved.
The public comment period for Nevada’s proposal ended on March 1, 2019, and there has yet to be a final ruling made.
Maryland
Just two weeks following Nevada’s proposal, Maryland Senator Jim Rosapepe introduced the Financial Consumer Protection Act of 2019  that aimed to establish “broker-dealers, broker-dealer agents, insurance producers, investment advisors, federally covered advisors and investment advisor representatives” as fiduciaries.
Following its introduction on February 4, 2019, the proposal was put to a vote and rejected by the Maryland Senate Finance Committee on April 3, 2019.
New York
New York Assemblyman Jeffrey Dinowitz first introduced the Investment Transparency Act in January of 2017 that would require brokers and other non-fiduciary financial advisors to disclose to their clients that they do not have to act in their client’s best interest. The act did not pass but was since reintroduced  on January 22, 2019.
New York’s effort is weaker compared to the fiduciary hopes of the other states listed above, and there is question on how it will play out following the introduction of Reg BI, which requires a document called Form CRS. The document’s purpose is to summarize information about a firm’s services, fees and costs, conflicts of interest, legal standard of conduct, and whether the firm and its professionals have had a disciplinary history. These details bear some similarity to the disclosure goal of the Investment Transparency Act.
As of today, the act is listed as “in assembly committee” on the New York State Senate website but has not seen movement since Reg BI’s introduction.
 

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