Advisors across the country are nervous about how the fiduciary rule-best interest rule saga may play out. To be honest, the situation has been growing bleaker by the week: numerous states are issuing their own fiduciary rules while the SEC and DOL both rework their original rules. This all means there is a good deal of regulation yet to come. Today, there is more reason to be sullen, especially if you are on the east coast, as Maryland has just announced plans for its own fiduciary rule. “(Financial professionals) have a fiduciary responsibility, morally, to make sure that their advice is in your best interest, but that has not been the law," said Senator James Rosapepe of Maryland.
FINSUM: State-based fiduciary rules with no federal rule, or a lighter federal rule, is just about the worst situation possible, as it will create a spider’s web of confusing and overlapping regulation with many grey areas and loop holes.
The SEC’s regulation Best Interest Rule appears to have backfired badly. A darling of the industry, in most senses, the rule is so convoluted and lacking in specificity that it seems to have been one step too far for the anti-DOL rule lobby. What we mean is that the rule was so poorly received, and so poorly defended by the SEC, that it can be seen as responsible for the big surge in state-level fiduciary rules that are cropping up across the nation.
FINSUM: The interesting part about this is that the SEC’s new rule, which was supposed to be the sensible solution between demands for a fiduciary standard and industry practicality, has completely undermined its own interests. The rule seems to have been so one-sided and poorly marketed, that it has only emboldened fiduciary advocates and “left them no choice”.
The fiduciary topic has mildly faded into the background in the media lately. The reason why is that the SEC and DOL are both in major revision/redrafting mode, with new versions expected to be released later this year. No one is sure how those will play out, but the most likely case right now appears bleak for advisors and the industry—a broad and relatively mild SEC best interest standard undergirded by much stronger and strict state-level fiduciary rules. That vision may be terrifying to some as it would create a complicated, and likely contradictory patchwork of state and federal rules, making inter-state business more difficult.
FINSUM: Patchwork from hell?
Don’t be fooled by the relative calm and quiet surrounding the fiduciary rule space. While the SEC’s BI Rule is being assessed, fiduciary rules are continuing to pop up at the state level all over the country. Nevada and Maryland are now pushing forward state fiduciary rules. They argue that in the absence of a federal rue, it is states’ job to step in and protect residents. The pair of states join many others doing the same, including New Jersey and New York.
FINSUM: You don’t see Nevada and Maryland put on the same list for almost anything! But that is a testament to how widespread this state-based push for fiduciary rules is.
Something very odd is happening at both the DOL and SEC. Ever since the fiduciary rule was killed by the courts earlier this year, a renewed sense of purpose seems to have washed over both agencies. While many thought complacency and a light hand would be the guiding approach of both regulators in the Trump era, somehow the opposite has happened. Now, industry lawyers say both regulators are pursuing enforcement at “epic levels of tenacity”. The focus has increasing been on the 401(k) business, but attention and activity has expanded across the board.
FINSUM: When the DOL declined to push its rule further, and the SEC stopped short of using the word “fiduciary”, most somewhat suspected there was going to be a lighter touch approach. Something has really changed.
The DOL’s fiduciary rule may be gone for now, but it is a long way from dead. The rule will be taking a new form in 2019, and even now, its spirit lives on in the form of a number of state-based fiduciary rules. One such is in New Jersey. However, Wall Street is putting up a massive fight to block the rule. Financial Advisor Magazine puts it this way, calling it a Battle Royale and saying it is “pitting the nation’s largest Wall Street and broker-dealer associations against comparatively tiny fiduciary advisor and financial planning associations”.
FINSUM: We think if NJ passed a comprehensive fiduciary rule, it would probably give momentum to not only the DOL, but a number of other states which are working towards this or are on the fence about it.