State Fiduciary Rules Create a Regulatory ‘Mess’

States are responding to inaction by SEC on a uniform standard and expected rollback of DOL rule

ERISA attorneys say that the bevy of states that are coming out with their own fiduciary standards are creating a regulatory “mess.” 

“The states are responding to both the inaction of the SEC to come up with a uniform standard and projected action on part of the DOL -- mainly [Labor Secretary Alexander] Acosta in rolling back some of the fiduciary rule,” George Michael Gerstein, a lawyer with Stradley Ronon Stevens & Young in Washington, told ThinkAdvisor in a Wednesday interview.

“Because broker-dealers are not subject to a formal federal fiduciary duty, some states may be seeking to impose a state fiduciary duty on them,” added Larry Stadulis, partner at Stradley Ronon. 

For instance, Nevada’s law is unique in that it not only says advisors are fiduciaries when dealing with retirement and non-retirement plans, but “expressly deals with disclosure, recordkeeping, as well as an ongoing duty to monitor that potentially goes beyond, and differs from, what’s required under federal law, though the anticipated regulations should clarify these issues.”

Nevada plans to hold an Oct. 6 workshop to solicit comments on the laws adopted through Senate bill 383, which among other things, imposes a fiduciary duty on broker-dealers and investment advisors.

Added Gerstein: “I hope the anticipated regulations will clarify whether and how Nevada’s newly revised law is intended to differ from current obligations at the federal law [level], whether that be the securities laws or ERISA.”

Gerstein said he's hearing from clients "there is widespread confusion about what this [Nevada bill] is supposed to mean.

“We’re awaiting the regulations that should help provide a lot of context and guidance” regarding the Nevada law, Gerstein added. The Nevada securities division plans “to work out the details [regarding the clarifying regulations] over the coming months.”

The patchwork of state laws is “a mess in the sense there’s real uncertainty about what brokers and advisors will be expected to do in the states that have introduced [fiduciary] legislation and, ultimately, enact it," Stadulis said. Advisors and brokers “don’t know what their obligations are under state law. What if they conflict” with DOL or a potential SEC rule. “What do you do?”

As it stands now, fiduciary regulation is in the works in New York, New Jersey, Nevada and Massachusetts.

The New York and Nevada bills “don’t look at all like Nevada’s,” Gerstein said.

As to Labor’s fiduciary rule, ERISA attorneys and industry officials anticipate Labor will issue any day now a regulation delaying the Jan. 1 effective date of the rule’s more onerous prohibited transaction exemptions by 18 months.

A comment period on the proposed 18-month delay — from Jan. 1, 2018 to July 1, 2019 — expired on Sept. 15.

With comments both for and against a delay in hand, all bets are on Labor forging ahead with the delay.

Fred Reish, partner in Drinker Biddle & Reath’s employee benefits and executive compensation practice group in Los Angeles, said that under the rules, Labor needs to consider the comments and develop a final decision after that process. 

“I suspect that so many comments will support the need for delay that the DOL will have the freedom to finalize it ‘as is.’  And, realistically, the department wouldn’t have issued the proposal [to delay] if they didn’t think it was the right thing to do. In that context, I don’t know what the negative commenters could have said that would be game changing.”

Meanwhile, Labor continues to defend its fiduciary rule in court.

In a Sept. 15 filing in the Court of Appeals for the District of Columbia Circuit regarding the case brought against Labor by the National Association of Fixed Annuities, Department of Justice attorneys, on behalf of Labor, stated: "The fiduciary rule is consistent with DOL’s longstanding regulatory approach.”

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