Who Wins in a Fiduciary Fight – Feds or States?
Individuals and groups who want to thwart the fiduciary rule initiatives of New Jersey, Massachusetts and Nevada are arguing the states' rules would be constitutionally invalid because they would conflict with federal law.
Sifma associate general counsel and managing director for public policy and advocacy Lisa Bleier explained as early as October 2017 why the broker-dealer lobby group believes a state-by-state approach to fiduciary rulemaking is a bad idea.
The approach “would subject financial professionals and firms to a confusing and potentially contradictory array of requirements and further muddy the waters for consumers trying to determine their relationship with their broker,” Bleier said at the time. She made the remarks during a rulemaking workshop conducted by the Securities Division of Nevada’s Secretary of State.
Nevada passed and signed into law its Senate Bill 383, subjecting broker-dealers and advisors — effective July 1, 2018 — to the Nevada Revised Statute for financial planners, NRS 628A. The law effectively imposes a statutory fiduciary duty on broker-dealers and advisors to act in the best interest of their clients and comply with disclosure requirements. Nevada is working on the fiduciary rule it proposed in January.
Bleier said Sifma is concerned that any new fiduciary duties in Nevada law would impose additional recordkeeping requirements that would violate the National Securities Markets Improvement Act of 1996.
She said NSMIA precludes states from enacting regulations relating to the making and keeping of records “that differ from or are in addition to” the requirements in those areas established under the Securities Exchange Act of 1934. Article VI, Clause 2 of the U.S. Constitution — the so-called Supremacy Clause — effectively makes federal law supreme when there is a conflict between state and federal laws.
“We are hard-pressed to envision a scenario in which new duties do not require the creation of a new record,” she said.
Sifma and other broker-dealer industry groups have echoed this argument when referring to other states’ fiduciary initiatives.
The New Jersey fiduciary rule proposal requires all investment professionals registered with its Bureau of Securities to act as fiduciaries to their customers when providing investment advice or recommending an investment strategy; when opening or transferring assets to any type of account; or the purchasing, selling or exchanging any security.
In a comment letter submitted earlier this month by the Financial Services Institute to New Jersey’s Bureau of Securities, the group says the state’s proposal “would have the effect of imposing new recordkeeping requirements on broker-dealers, as they seek to develop, implement and document policies and procedures to demonstrate compliance.”
For example, broker-dealers who receive commissions on securities transactions that result from their solely incidental investment advice would be required to overcome a presumption of a breach of the duty of loyalty, according to FSI.
The broker-dealers and agents would also be required to keep records that document and demonstrate why their recommendations are the “best of the reasonably available options,” FSI adds.
In its own comment letter on the New Jersey proposal, Sifma reiterates the NSMIA-related concerns it had with the Nevada proposal and adds that it would also be pre-empted by other federal laws. Sifma says the proposal even violates the New Jersey Administrative Procedure Act because it fails to include a description of the record-keeping requirements being proposed for adoption and fails to include a cost-benefit analysis.
But in a comment letter submitted last week by 17 investor protection groups to New Jersey’s Bureau of Securities, the group says “NSMIA pre-empts states only in specifically enumerated areas, none of which are implicated” in New Jersey’s proposed fiduciary rule.
Sifma, the FSI and other broker-dealer industry groups “incorrectly argue that the reference to recordkeeping in NSMIA precludes states from promulgating a fiduciary duty for brokers’ advice,” according to the group, which includes the Alliance for Retired Americans, Americans for Financial Reform Education Fund, Consumer Federation of America and New Jersey Citizen Action.
“They erroneously claim that any heightened state-based standard of conduct that might cause a firm to voluntarily keep a record that isn’t also required under federal law would be pre-empted. This is clearly wrong. Merely because a firm may voluntarily choose to adopt more rigorous recordkeeping practices for their own business purposes does not mean that the firm is legally required to do so,” the groups add.
The investor protection groups say nothing in the New Jersey proposal imposes an “affirmative obligation” on broker-dealers to keep new or additional records.
“To the contrary, the proposal makes abundantly clear that, ‘Nothing in this section shall be construed to establish any … making or keeping of records ... for any broker-dealer or agent of any broker-dealer that differ from, or are in addition to, the requirements established under 15 U.S.C. Section 78o(i),'” the groups say.
The groups were referring to the NSMIA section on limitations on what states can do when regulating brokers and dealers.
Specifically, the section says: “No law, rule, regulation, or order, or other administrative action of any state or political subdivision thereof shall establish capital, custody, margin, financial responsibility, making and keeping records, bonding, or financial or operational reporting requirements for brokers, dealers, municipal securities dealers, government securities brokers, or government securities dealers that differ from, or are in addition to, the requirements in those areas established under this chapter.”
The groups say existing recordkeeping requirements under federal law should be more than enough to determine whether a firm has complied with New Jersey’s proposed fiduciary rule.