Is state-run regulatory compliance the future?

Experience Is No Excuse
October 17, 2018
Compliance Week On Compliance
October 31, 2018

Is state-run regulatory compliance in your future?

A recent article by Mark Miller in Wealth Management magazine reported a new wrinkle in broader fiduciary protection for investors…the states. As it increasingly looks as though the push to broaden fiduciary protection for investors at the federal level is becoming a non-event, Miller reports that the states are happy to pick up the regulatory gauntlet.

Is the fiduciary standard dead?

Maybe at the federal level but interest is up across state and local governments. According to Miller, the Department of Labor fiduciary standard is dead[4], and the Securities and Exchange Commission (SEC) is moving toward adoption of the so-called Regulation Best Interest standard – all of which is likely to cause even greater confusion about the roles and fiduciary responsibilities of broker/dealers and advisors.

Will there be more financial regulatory oversight?

Oh. Yes. Miller says that the federal retreat has prompted some states to enact fiduciary rules of their own. Nevada lawmakers[6] approved a law last July that extends an existing fiduciary law to include not only financial planners but stockbrokers and other commission-based investment representatives. Advisors also must disclose profits or commissions they earn on client investments.

Legislation also has been adopted[7] in Connecticut. New York, New Jersey, and Maryland also are considering fiduciary legislation. These actions, Consumer Federation of America’s Director of Investor Protection Barbara Roper told Miller, are the result of inadequacies of the SEC’s proposal which has prompted a number of states to consider what actions they may take to strengthen protections for investors.

Financial services lobby against state interference

Miller’s report noted that groups representing broker-dealers and the insurance industry have made clear that they will fight any state-level initiatives[8]. SIFMA and other trade groups have argued that the National Securities Markets Improvement Act of 1996 limits the ability of states to create new recordkeeping obligations for broker-dealers and may contain other barriers to state action on fiduciary standards.

Meanwhile, Miller notes, an interesting difference of opinion has surfaced between key organizations representing the planning profession. The Certified Financial Planner (CFP) Board of Standards announced in September that it would oppose regulation of financial planning as a distinct profession by states, citing the cost and regulatory burdens for planners who work in multiple states. The Financial Planning Association (FPA) has taken a slightly different road. In a statement to its members, FPA said: “In this increasingly competitive landscape, we don’t believe it serves our members’ or the profession’s interest to dismiss any national or state advocacy strategy. Frankly, what seems right today from a policy or strategy standpoint, may not be right tomorrow.”

Most organizations prefer Federal oversight

Both the FPA and the CFP agree that a federal solution is preferable and less likely to result in a fragmented and possibly contradictory regulatory environment. Key to most organizations is consistency – regulatory uniformity across state lines regarding fiduciary standards.

Miller reports that there is plenty of reason to worry about developments on the federal level. As proposed, the Regulation Best Interest contains poorly defined standards and confusing consumer disclosure forms. He noted that usability testing conducted of the proposed SEC Customer Relationship Summary form earlier this year brought up numerous serious problems.

The tests showed that investors:

  • Did not understand the form’s legal disclosures or the term “fiduciary standard.”
  • Based on their understanding of the term “best interest,” viewed the CRS as portraying brokerage accounts in a more favorable light than advisory accounts.
  • Did not understand critical distinctions between different payment models, fees and associated services.
  • Could not figure out which type of fees might cost more.
  • Thought conflicts would not impact them.

Regulatory confusion reigns

Miller expects that confusion about fiduciary roles likely will be rampant in the marketplace in the foreseeable future as the federal role diminishes. He posits that a strong federal standard would be best; a checkerboard map of state regulations will only create some difficulties for planners, but some protection will be better than none.

 That’s where Patrina comes in. We’ve built our business based on helping organizations stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective and comprehensive, 8-module compliance solution, and compliant data capture, file storage, records archiving, and designated third-party services specifically designed for the financial services community. Be smart. Be covered.

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