States to the Rescue

If you haven’t been keeping track, the new frontier for imposing a fiduciary standard appropriately—that is, on everybody who calls themselves an advisor, and on the reps of every firm that advertises that you should “contact our professional advisors”—is at the state level. 

The New Jersey Bureau of Securities has issued a rule proposal which directly rebukes the brokerage industry.  “Investors remain without adequate protection from broker-dealers who, under the suitability standard, are permitted to consider their own interests ahead of their clients’ interests when making investment recommendations,” it says.  It notes that investors basically have no idea what standards their “advisors” are held to or who is regulating them. 

So?  “The Bureau is soliciting comments regarding amendments new rules that would require that broker-dealers, agents, investment advisers, and investment adviser representatives be subject to a fiduciary duty.  The Bureau believes that this uniform standard protects investors against the abuses that can result when financial professionals place their own interests above those of their customers.”

This, of course, is what many of us hoped the SEC would do, before it became obvious that the SEC staff is completely controlled by the brokerage industry.  But apparently the brokerage industry doesn’t control New Jersey, or the state of Nevada either.  Nevada Senate bill 383, adopted last year, imposes a statutory fiduciary duty on broker-dealers and investment advisors.  But now the Nevada Securities Division has to put some teeth into that regulation by figuring out just what this means in the marketplace. 

It has recently proposed that the fiduciary duty be imposed on BD reps and wirehouse sales representatives whenever they provide investment advice or maintain assets under management.  Also, the fiduciary standard would apply to any BD or wirehouse rep who holds him/herself out as an advisor or adviser, financial planner or financial consultant, retirement consultant or retirement planner, wealth manager, counselor or other titles that the Administrator may find out about at a later date.

I have some reservations about the Nevada law.  It permits the sales of proprietary products by the wirehouse or BD rep if the rep “has advised the client that the product is proprietary and advised the client of all risks associated with the product” (i.e., disclosure), and permits transaction-based commissions “so long as it is in the client’s best interest to be charged by transaction as opposed to other types of fees, and the commission is reasonable.”  Moreover, it says that the fiduciary duty ends after a product recommendation is made, so long as the BD or wirehouse rep doesn’t provide periodic financial plans for a client. 

Most troubling, the rule appears to grandfather existing relationships between customers and reps.  If you’ve been recommending terrible products before to someone, you may continue to do so without interference.

Nevertheless, I view this particular glass as half-full.  My guess is that other states will look at the New Jersey and Nevada fiduciary initiatives, spot the holes in them and repair them.  And the brokerage industry appears to be terrified of trying to defend the actions of its brokers in light of the very word “fiduciary,” which cannot help but start corner office executive discussions about reforming a dirty system.

Waiting for the SEC to actually enforce the ’40 Act has been a source of ongoing frustration for decades, so it may be time for the fiduciary movement to shift to a new direction. 

The brokerage industry has been amazingly successful at convincing Congressional representatives that it’s bad policy to require people calling themselves an “advisor” to treat their customers like they would their grandmother, and they’ve actually proven in court (re: the overturned DOL rule) that their brokers and reps are actually merely salespeople.  They may well hijack the emergent fiduciary trend in the states, or overpower it with bales of lobbying money. 

But for now, maybe we can hope that the state legislatures and securities administrators are more principled than their counterparts at the SEC—or at least more willing to protect their constituents.

Leave a Comment