States to Trump: Leave Retirement Rule Intact or We’ll Act
Legislatures, regulators across country move to shore up investor protections as fiduciary rule is reviewed
By Lisa Beilfuss
Sept. 12, 2017
The controversy over a rule restricting conflicted retirement advice is shifting to states, which are moving to bolster investor protections out of concern the Trump administration will weaken the federal provision.
In recent months, the governors of Nevada and Connecticut signed bills to expand or amplify “fiduciary” requirements for brokers. Legislators in New York, New Jersey and Massachusetts have introduced similar bills. And several other states, including California, have indicated interest in exploring such requirements.
Unveiled last year, the Labor Department’s fiduciary rule requires brokers to act in the best interests of retirement savers rather than sell products that are merely suitable and potentially more lucrative for the brokers. Financial-industry leaders have fought against the Obama-era regulation, saying it would limit investment options, elevate costs and potentially cut off low-balance customers from some forms of professional advice.
The states’ efforts come as the fate of the federal rule, which partially went into effect in June, remains in question. President Donald Trump shortly after taking office ordered the Labor Department to re-evaluate the economic impact of the rule with an eye toward repeal or revision. The states in many cases are looking to go beyond the federal rule, which only governs advice on tax-advantaged retirement savings, and instead require that brokers uphold a fiduciary standard across all accounts.
The piecemeal legislative efforts have galvanized the industry just months after many in it had cheered Mr. Trump’s election as a chance to roll back regulations perceived as arduous and costly to comply with. Industry executives and trade groups say they are watching the states’ actions and beginning to lobby at the state level to prevent a scenario where state laws mushroom as the federal fiduciary rule dwindles.
“The states are ... picking up the pieces,” said John Grady, an attorney who also leads the Alternative and Direct Investment Securities Association. “People feel there’s a vacuum they have to fill.”
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While the industry has decried the federal rule, it has turned out to be been a boon for Wall Street as firms push customers into the fiduciary-friendly—and typically more-lucrative—accounts that charge an annual fee. At the same time, the more onerous elements of the regulation, including client disclosures and a contract that would increase litigation risk, have been delayed until July 1, 2019, and are likely to be significantly revised or eliminated.
“We have been concerned that there is momentum under way on the issue” at the state level, said a spokesman for the American Council of Life Insurers, an industry group that has opposed the federal rule. Some executives and trade groups say state efforts make it more critical that the Securities and Exchange Commission steps in to write its own rule that would supersede the Labor Department’s and require a fiduciary standard on both retirement and nonretirement accounts.
SEC Chairman Jay Clayton has expressed interest in such a standard. In June, the SEC said it would consider strengthening rules on how brokers advise individual investors, seeking public feedback on its plans. The SEC didn’t respond to a request for comment.
Meanwhile, many states remain steadfast in wanting to preserve the goals of the fiduciary rule. A bipartisan group of 13 state treasurers, in a letter to Labor Secretary Alexander Acosta dated June 7 said: “We are committed to protecting the financial interests of our constituents—in particular, ensuring that retirement planning and investment advice is not conflicted.” The treasurers, including those from Pennsylvania, Oregon and Iowa, asked Mr. Acosta to preserve the “common-sense measure.”
States’ efforts may have taken on new urgency in recent weeks after Mr. Acosta moved to delay the rule’s final compliance deadline by 18 months, a signal that the rule’s re-evaluation will result in changes. As well, the Labor Department recently suggested it intends to eliminate the rule’s main enforcement mechanism, a provision that allows investors to bring-class action suits against advisers they say violated their fiduciary duty.
“This is a mobilization based on concerns that the DOL rule may be unhinged,” said Erin Sweeney, an attorney at Miller & Chevalier Chartered who counsels firms regarding fiduciary obligations.
Nevada is emerging as a test case, observers say, because its rule could expand the reach of fiduciary obligations to all investment assets and not just tax-advantaged retirement assets. The state’s securities regulator is writing the regulation and details aren’t yet clear.
Experts say states’ actions could face legal challenges. The National Securities Markets Improvement Act of 1996 limits what states can do on their own and aims to prevent patchwork regulation. Potentially inconsistent state regulations could raise compliance costs more than a single federal rule would have, experts say, with consulting firm AT Kearney estimating that the federal rule would result in up to $20 billion in lost industry revenue through 2020.
“This could become a bit like Frankenstein,” said George Gerstein, an attorney at Stradley Ronon Stevens & Young LLP who represents financial-services firms. “If states go their own way on this, it could become a nightmare.”
New York State Assemblyman Jeffrey Dinowitz, a Democrat, said he began working on a fiduciary bill several years ago and dropped the effort after the Obama administration took it on to protect the $17 billion it said consumers lose annually to conflicted advice. “But under the Trump administration, the regulation that would have been in effect this year isn’t,” he said, referring to the delay in the final compliance deadline. “We’re back to square one.”
Mr. Dinowitz reintroduced a fiduciary bill on Jan. 20.
Meanwhile, industry executives are watching California, where a Senate resolution introduced in June “has telegraphed to [regulators] that they shouldn’t tinker too much with the DOL rule,” Mr. Gerstein said. If that translates to a bill, he said, “then that changes everything.”
California’s securities regulator said it is separately watching what happens in Washington and could act independently of the state’s legislature.
Observers say that while some firms could decide to leave Nevada to avoid an onerous regulation, they can’t ignore the most populous state. If California enacts its own fiduciary rule, experts say it could effectively render the Labor Department’s rule moot—whatever the outcome of the re-evaluation.
If California acts, “this takes on a life of its own,” said Mr. Gerstein.
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