State Fiduciary Rules on a 'Collision Course' With Reg BI: Lawyers

States contemplating their own fiduciary rules “are on a collision course with where the federal law [under the SEC's Reg BI] is going, which is going to set up some very difficult debates and probably some litigation,” Brad Campbell, former head of the Labor Department’s Employee Benefits Security Administration, who’s now a partner at Drinker Biddle in Washington, said on a Thursday call.

Massachusetts has issued “a very similar” regulation to the one issued by New Jersey, Campbell said on Drinker Biddle’s Inside the Beltway call, with both states calling for a uniform fiduciary standard. “They would both put in place some rather troubling, in my view, restrictions that would have pretty negative effects on the availability of transacting compensation.”

The other “big issue,” Campbell continued, “is to what extent are these [state] rules pre-empted by federal law? Does the National Securities Markets Improvement Act pre-empt these state efforts or not?” Also, does the Employee Retirement Income Security Act “pre-empt them depending on how they’re written?”

The Securities Industry and Financial Markets Association, Wall Street’s trade group, told William Galvin, Massachusetts’ top securities regulator, in a Friday comment letter that Massachusetts’ plan will result in the same negative consequences as the now-defunct Labor Department fiduciary rule.

SIFMA also urged the Massachusetts Securities Division to hold off on implementing its own fiduciary regulation and instead defer to the Securities and Exchange Commission’s Regulation Best Interest.

The Massachusetts proposal “limits access by imposing additional fiduciary requirements that will result in further constriction of the brokerage model,” Lisa Bleier, SIFMA’s general counsel, wrote. “Consumers will be adversely affected by the limitations placed on programs available to them, the pricing of those programs, and the investment products available — which could include losing access to personal, one-on-one assistance.”

Bleier also maintained that “substantial inconsistencies between the federal standard and the proposed Massachusetts rule will also create confusion for consumers and financial professionals and come with significant operational and compliance costs.”

Massachusetts should allow Reg BI “to be fully implemented before moving forward with a state-specific fiduciary rule,” Bleier stated.

Once Reg BI is “fully operational and the SEC, FINRA and state regulators begin examining for compliance, the Division will find that Massachusetts investors are receiving substantial additional protections while continuing to have access to the numerous choices and opportunities they have today.”

The Financial Services Institute told the Massachusetts Securities Division in its Friday comment letter that Reg BI “strikes the right balance between the Division’s stated goal of protecting investors against the abuses of conflicted recommendations and retail investors’ interests in preserving access to investment advice and products.”