Regulatory Outlook | 11.20.18
Democrats Gain Ground in Statehouses, Re-energizing Fiduciary-Related Measures
Nearly a decade of Republican dominance in U.S. statehouses came to an end during the midterm elections earlier this month. Democrats netted roughly 300 seats nationwide and flipped control of six statehouses, including New York’s (a notable flip for the financial services industry).
Additionally, Democrats reclaimed seven governorships and now control all three statehouse branches in 13 states.
The state-level blue wave potentially could recharge efforts to push fiduciary-related measures, said Dan Viola, partner, Sadis & Goldberg.
"There is a perception that if the [Securities and Exchange Commission] doesn't go far enough with Regulation Best Interest, you could see some blue states take matters into their own hands," Viola said. "Although from what I can tell, having read over various state proposals, few of them seem workable."
New York Proposal Mandating Blunt Disclosure Language Could Resurface
Because New York City is so closely tied with financial services, much attention is being paid to Bronx Assemblyman Jeffrey Dinowitz, who said after the election that he plans to re-introduce the Investment Transparency Act.
The measure would mandate greater levels of disclosure by non-fiduciaries that provide investment advice, requiring signed disclosure expressly informing clients that the advisor owes no fiduciary duty, using the following language: "I am not a fiduciary. Therefore, I am not required to act in your best interests, and am allowed to recommend investments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks and expected returns for you."
Connecticut’s Senate had been split but is now held by Democrats. The state is considering new disclosure provisions for advisors.
Where there is Democratic control of both chambers and the governor's office — in states such as Colorado, New Mexico, Illinois and New York — "it's always possible that you will see fiduciary-related legislation introduced,” said Duane Thompson, senior policy analyst at fi360, a fiduciary training firm, interviewed by Financial Planning. But Thompson stressed that a cascade of such activity was unlikely.
The Dinowitz legislation died in Albany earlier this year because no companion measure existed in the New York State Senate. However, Democrats just regained control of that chamber for the first time since 2010.
In all, Democrats seized control of seven legislative chambers and lost one (Alaska) to the GOP. In addition to New York, the Democrats flipped the State senates in Colorado and Maine. They also took over the House in Minnesota. In one of the biggest victories, they flipped both chambers in New Hampshire.
The Democrats ended Republican supermajorities in the Michigan and Pennsylvania Senates, and both chambers in North Carolina.
A “Potentially Contradictory Array of Requirements”
The states of Maryland, Massachusetts, New Jersey and New York have all recently introduced their own fiduciary standards for broker dealers. More states could follow.
Generally, at the state level, Viola explained, there remains a longstanding concern that retirement accounts are vulnerable to churning by brokers’ earning commissions, even though most of the industry has moved to managed accounts and long-term asset allocations to mutual funds. It’s true, he said, there are representatives who are licensed brokers but not registered investment advisors, and there are those who are both (so-called “dual hats”). So, when you factor in the designation overlap with the common scenario of advisory professionals handling various types of accounts (personal trading versus retirement), the result is an overly confusing and onerous set of protocols too difficult to pull off and supervise, Viola said.
Industry groups continue to express concern that states passing their own regulations would create a confusing patchwork, and urge state lawmakers to allow the Securities and Exchange Commission (SEC) to go forward with plans to create a single uniform set of standards for brokers and advisors alike.
The Securities Industry and Financial Markets Association has said that a state-by-state regulatory environment 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.”
Even prior to the election, five states were pushing ahead with their own state-specific fiduciary standards.
Last July, Nevada passed a law creating definitions of financial planners and broker-dealers, and requiring financial planners fully disclose compensation tied to advice.
Following Nevada, four more states — Connecticut, New York, New Jersey and Maryland — subsequently either passed or proposed legislation establishing fiduciary standards.
"It remains to be seen if other states will follow the example set by these five states or if others will wait for a federal mandate from the SEC before proceeding with legislation,” said AdvisorNews’ managing editor Cassie Miller.
Rich Blake A veteran journalist based in New York City, Blake has covered the financial world for numerous publications, including Institutional Investor, ABCNews.com and Reuters. Blake was a co-founder and executive editor of Trader Monthly magazine. The Buffalo native is the author of three nonfiction books, including “The Day Donny Herbert Woke Up,” which is currently being adapted into a motion picture. In 2004, Blake was nominated for a National Magazine Award in the Reporting category for Institutional Investor.