Broker-dealer lobby group Sifma believes the rules that govern the brokerage and advisory industries should be created and imposed on a national level, and the SEC is in the best position to implement such regulation. State regulators, therefore, should stay out of the way of the SEC, which is in the process of finalizing its proposed Regulation Best Interest, according to the lobbyists.
“Our first message to state regulators is Congress long ago appropriately determined we should have a national market structure in the U.S., not bifurcated,” Kenneth Bentsen, Washington, D.C.-based president and CEO of Sifma, said at a media briefing on Thursday. “It’s really not good policy to end up with a patchwork of rules in this area.”
Bentsen said Sifma has been sharing its views with both Nevada and New Jersey regulators.
New Jersey is the latest state to take matters in its own hands after the Department of Labor’s fiduciary rule was vacated. The latest initiative from the New Jersey Bureau of Securities is a proposed rule that would impose a fiduciary duty on all investment professionals in the Garden State, requiring them to place their clients’ interests above their own when recommending investments.
The New Jersey Division of Consumer Affairs published a pre-proposal notice in October and is seeking comments. Two “informal” conferences were held in November to discuss the pre-proposal and testimonies were given by interested parties. Governor Phil Murphy expects New Jersey to be “among the first states to adopt a uniform fiduciary standard,” signaling others are expected to follow suit.
Last year, Nevada and Connecticut also took investor protection matters into their own hands.
Nevada imposed a statutory fiduciary duty on brokers and advisors who give advice to Nevada-based clients. Connecticut passed a bill requiring service providers for 403(b) plans of Connecticut-based public education organizations, some non-profit employers, cooperative hospital service organizations and self-employed ministers not covered by the Employee Retirement Income Security Act of 1974 to disclose conflicts of interest to a plan’s fiduciaries starting January 1, 2019.
Bentsen said the states should “let the SEC proceed as Congress intended” under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. “We hope the states will pause and figure out how [the proposed Reg BI] will protect their citizens in their states,” Bentsen added.
Bentsen and Sifma chairman Jim Allen said they expect the proposed Regulation BI to be finalized by the second quarter of 2019, echoing the expectations of other industry leaders.
The SEC was required by the Dodd-Frank Act to look into the obligations and standards of conduct of financial professionals, and to evaluate – among other things – the effectiveness of existing legal or regulatory standards governing these professionals. The SEC staff first submitted a study to Congress in 2011.
The “unintended consequences” of having multiple state regulations governing brokers and advisors include “inefficiency, higher cost and potential restriction of choice,” according to Lousiville, Ky.-based Allen, who is also the chairman and CEO of Hilliard Lyons.
“We don’t want that to happen across 50 states plus D.C.,” and other jurisdictions, Bentsen said. “That would be a very bad outcome for investors.”
Generally speaking, Allen said the brokerage industry is “now at the back end of the most significant regulatory overhaul since the 1930s,” and Sifma’s goals in the coming year include “making sure rules don’t go too far.”
As Sifma chairman, Allen said his three main priorities are having a client-first focus for the industry, reinforcing the Main Street investor focus, and enhancing client experience and investor protection.
Allen said the proposed Reg BI already “exceeds Sifma standards” because of – among other things – its proposed new and heightened care and duty to mitigate conflicts.
“The new proposal represents the new best interest standard with real teeth,” he said. “It preserves customer choice while … avoiding DOL flaws,” such as the greater cost and less choice that would have been consequences of the vacated DOL rule.
Allen said, however, that the proposed Reg BI needs “clarification, modification and additional guidance” in “some areas,” including the “scope of practical terms” of the proposed rule and “implementation issues.”
The proposed Reg BI is a “much better starting point” than the DOL fiduciary rule and operationally, the cost to the brokerage industry will be “significant but manageable,” according to Allen.
Allen said he doesn’t expect any “significant modifications” in the final version of the proposed Reg BI, except for potential changes to the Customer Relationship Summary disclosure form.
Credit should be given to Sifma for its role in getting the DOL fiduciary rule vacated and having the current version of the proposed Reg BI, according to Allen. “Sifma deserves credit for steering this in right direction,” he said.