State fiduciary rules slow down amid pandemic, political transition

Efforts to raise the investment advice standard for brokers at the state level stalled in 2020 due to the pandemic and could remain quiescent following political turnover in Washington.

In April 2019, New Jersey proposed a regulation that would impose a fiduciary duty on brokers. The measure had to be finalized by last April or else it would expire. But the deadline was extended until 90 days after the coronavirus health emergency.

Nevada enacted a fiduciary law in 2017. But the rulemaking process to implement it remains in limbo. Massachusetts finalized fiduciary rules in September and took its first enforcement action — against Robinhood — on Dec. 16.

“A lot of this would have proceeded much faster but for COVID,” said Brad Campbell, a partner at Faegre Drinker Biddle & Reath.

The pandemic will continue to put stress on state budgets and consume the time of political leaders. Investment advice reform may not be a priority, said Stephen Murphy, managing director at Foreside Financial Group, a consulting firm.

“It’s not going to be politically expedient to go after something that is complex, difficult to explain and marginally beneficial to their constituents,” Murphy said.

Another factor that could keep states on the sidelines is the election of Joe Biden as president. Many of the states that pursued advice regulations or legislation did so because they said Regulation Best Interest, the new broker standard promulgated by the Securities and Exchange Commission, was too weak to curb broker conflicts.  

But now that Biden will be in the White House, the SEC will have a Democratic majority that might revisit investment advice policy. That could put the states, many of which have Democratic political leaders, in a wait-and-see mode.

“We expect the states to pause momentarily as the Biden administration comes into power,” said Peter Dugas, executive director at Capco, a global financial services consulting firm. “Given the fact that it will be a Democratic administration, we expect coordination at the federal level for fiduciary and best interest policy and standards.”

The incoming Biden administration could prevent an expansion of state-level fiduciary rules.

“Does this prevent 10 to 15 states from joining the vanguard?” Campbell said.

The Massachusetts measure was revised to address some financial industry concerns. For instance, it does not impose an ongoing fiduciary duty on brokers and does not cover variable annuity sales.  

“The final Massachusetts fiduciary regulation ended up being very straightforward … avoiding litigation that otherwise was quite likely to occur,” Campbell said. “Are they going to interpret and enforce this rule in a manner that resurrects some of the problems that were [sidestepped] by the changes to the final rule? It’s a little too early to tell.”

Nevada brokers have had a fiduciary advice standard for years. It’s the implementation that is in flux.

“Our fiduciary duty for broker-dealers to their clients is codified, and the proposed regulations are clarifying, not enabling,” said Erin Houston, Nevada deputy secretary of state for securities. The securities division hopes to finalize the regulations soon.

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