Maryland became the latest state to enter the fiduciary fray by proposing last week a “sweeping” bill that, if passed as written, would not only have “a profound impact on the financial services and insurance industries in the state,” but would also put advisors in the state under more stringent fiduciary requirements, according to Stradley Ronon attorney William Mandia.
In the law firm’s Fiduciary Governance blog on Monday, Mandia writes that Maryland’s Financial Consumer Protection Act of 2019, S.B. 786, released Feb. 4, includes a section that would make broker-dealers, broker-dealer agents, and insurance producers fiduciaries, as well as incorporates a suggestion by the Maryland Financial Consumer Protection Commission to beef up the state’s advisor fiduciary rules.
The commission noted in a January report that Maryland’s regulation of investment advisors “was, in its view, less robust than federal law,” Mandia told ThinkAdvisor.
The commission stated in its report that “these Maryland standards taken together, though, may provide less investor protection than the standard set forth in Dodd-Frank Section 913(g) and used by DOL in its rule which reads: ‘shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer or investment advisor providing the advice,’” Mandia said.
Maryland’s proposed bill contains a provision intended to address the advisor fiduciary issue by “essentially parroting” the commission’s language, Mandia continued, by requiring a covered person “to act in the best interests of the customer without regard to the financial or other interest of the person or firm providing the advice.”
Maryland’s 2019 proposal differs from the state’s 2018 bill, which stated that “a person subject to this section is a fiduciary and has a duty to act primarily for the benefit of its clients,” Mandia points out.
Maryland’s 2019 plan “is very broad as applied to insurance producers, making them fiduciaries in the context of a wide range of transactions,” Mandia said, and will likely meet “fierce opposition” from industry groups and others.
It’s hard to predict, however, if Maryland’s bill will succeed, Mandia conceded.
“Just last year, Maryland’s General Assembly declined to pass a similar provision that would have made broker-dealers and insurance producers fiduciaries. The current proposed legislation, however, comes against a different backdrop,” as the Maryland Financial Consumer Protection Commission issued its January report recommending changes to Maryland law.
After declining to pass the legislation proposed in 2018, Mandia explained, “the General Assembly directed the commission to study the outcome of federal efforts on fiduciary duty and determine whether Maryland should enact its own fiduciary law.”
While most states will likely “wait to see” the SEC’s final Regulation Best Interest and the National Association of Insurance Commissioners’ revisions to its Suitability in Annuity Transactions Model Regulation “before determining whether they should take any action on their own,” Mandia states, “states that have historically been aggressive in addressing consumer protection may be less apt to wait for a national standard.”
He pointed to the regulations adopted by New York’s Department of Financial Services in 2018, and the recent activity in Nevada and New Jersey,
Fred Reish, a partner and head of Drinker Biddle’s ERISA Financial Services Group, added that, under Maryland’s bill, the Maryland Commissioner of Financial Regulation “may adopt regulations to carry out the fiduciary duty” required under the bill.
As a result, “we are left to wonder how the standard will be defined,” Reish said. “For example, the DOL fiduciary rule require[d] that a fiduciary act with the care, skill, diligence and prudence of a person who is knowledgeable about the particular issue. The New York regulation also uses the words ‘care, skill, prudence and diligence,’ as does the SEC in its proposed Regulation Best Interest for broker-dealers.”
Added Reish: “I suspect that the Maryland regulators will develop a similar standard, but that remains to be seen.”
Complicating compliance matters further is whether the SEC’s federal Reg BI “would pre-empt the conflicting state laws,” adds Stradley Ronon attorney George Michael Gerstein.
Reish adds that the securities and insurance industries are arguing against the state bills “because of the complexities and effects of differing standards from state to state.” Consumer protection groups, meanwhile, argue that the SEC proposal in Reg BI “is weak and the states need to develop higher standards. Also, Reg BI would not cover insurance producers — except for individual variable annuities, while Maryland proposes to (as will the New York rule).”
The Investment Adviser Association is also monitoring state fiduciary efforts “to ensure that the states do not apply their rules to SEC-registered advisors in violation of the National Securities Markets Improvement Act, which pre-empts states” from such activity, according to an IAA spokesman.
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