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State Fiduciary Rules May have Day in Court

State Fiduciary Rules

State Fiduciary Rules May have Day in Court

State fiduciary rules and the ensuing conversation will very likely end up in court.  Regulators have been battling this hot topic for more than a decade, and the state fiduciary rules along with other fiduciary duty rules are not likely to be settled unless it occurs inside of a courtroom.   Even with the pending implementation of the Securities and Exchange Commission’s Regulation Best Interest (Reg BI).

According to a recent InvestmentNews article, more states are jumping into the fiduciary fray and coming up with their own versions of state fiduciary rules. That’s likely to continue muddying the waters when it comes to the standards governing investment advice. It is clear the financial industry will challenge the state fiduciary duty rules in court. This will give rise to a showdown, which should determine who is ultimately responsible for overseeing investment advice standards — the SEC or state fiduciary rules, or if there is an opportunity for a combination of both.

Massachusetts and New Jersey are finalizing state fiduciary duty rules that would require advisors in those states to adhere to standards as stringent as those followed by investment advisors. All eyes are on the Securities and Exchange Commission’s Reg BI, which as InvestmentNews explained, “is designed to raise the broker standard above the current requirement of suitability.” In addition, the SEC rule would continue to hold investment advisors to the same fiduciary standards.

The states have chosen to implement their own state fiduciary rules governing fiduciary duty because they assert that Reg BI fails go far enough to protect investors. On the other hand, brokerage firms argue that Reg BI is stringent enough, and stronger rules on fiduciary duty aren’t needed at the state level. In addition, the brokerages insist that having individual rules at the state level would “increase compliance costs and limit the advice market,” according to InvestmentNews.

The SEC has not indicated whether its fiduciary duty regulations would supersede the state fiduciary rules of individual states. In fact, Reg BI faces two separate lawsuits, which have been filed by state attorneys general and a network of investment advisors, InvestmentNews noted. If it can get over this legal hurdle, however, Reg BI is slated to go into effect on June 30. By then, lawsuits against state fiduciary rules could also begin.

There are many outstanding legal questions surrounding Reg BI and the proposed state fiduciary rules, and there’s no precedent. Which means any legal challenges open up entirely uncharted territory for the interpretation of these rules. In addition, state fiduciary rules like the one Massachusetts has proposed could create more recordkeeping headaches for brokers. Additional recordkeeping requirements are a non-starter under the National Securities Markets Improvement Act of 1996. Both Massachusetts and New Jersey refused to comment on their respective state fiduciary rules while in the rule-making process, InvestmentNews noted.

While there is a lot of uncertainty about which rules will prevail and what it all means for the financial industry, one thing is for sure: each states’ ability to create their own state fiduciary rules will come under scrutiny in the courts in the coming months.

Steff Chalk

Steff Chalk

Managing Editor at 401kTV
Steff C. Chalk is Executive Director of The Retirement Advisor University, a collaboration with UCLA Anderson School of Management Executive Education. Steff also serves as Executive Director of The Plan Sponsor University and is current faculty of The Retirement Adviser University.
Steff Chalk
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