SIFMA Dismisses State Fiduciary Proposal; Advocates for a Uniform Federal Standard

SIFMA criticized New Jersey’s proposal to create a state fiduciary standard, calling a federal standard the “optimal approach” compared with an “uneven patchwork” of state laws.

In a comment letter, SIFMA emphasized that Regulation Best Interest (“Reg. BI”) will better protect investors and avoid confusion, as compared to a state-by-state approach. According to SIFMA, New Jersey’s proposal would (i) impose costly and burdensome regulations on firms, (ii) incentivize firms to restrict their brokerage services in New Jersey and (iii) cause many middle-class investor to lose access to advice altogether.

Specifically, SIFMA stated that the proposal would:

create, in certain instances, a burdensome ongoing fiduciary duty;

establish an “impossible ‘best of’ standard for recommendations of account-types, asset transfers, purchases, sales or exchanges of securities, and transaction-based compensation”;

enact requirements duplicative of Reg. BI; and

fail to address certain common brokerage activities, such as principal trading.

SIFMA advised New Jersey to “substantially revis[e]” its proposal to avoid these potential consequences.

COMMENTARY / STEVEN LOFCHIE

The establishment of heavier federal and state burdens on broker-dealers providing clients with recommendations, combined with the potential great diversity of state regulation, is yet another blow to the business model of “full-service brokerage,” in which broker-dealers provide “suitable” recommendations to individual clients and are compensated by their receipt of securities execution fees. If broker-dealers are going to be tasked as fiduciaries in making any recommendation to investors, then they need to consider whether the economics of undertaking this obligation without being expressly compensated for it makes sense. (See generally the Cabinet memorandum Choose One – Best Interest or Full Service.)

Leaving aside the heavier burden the regulators would impose on broker-dealers, the complexity of a 50-state regulatory regime (combined with an already very complex regulatory regime) simply makes things worse for firms registered as broker-dealers. The number of broker-dealers will continue to decline, the ability of investors to obtain intermittent investment recommendations outside of a formal advisory relationship (and the associate fees) will continue to decline, and regulators will continue to bemoan the increased concentration of financial service firms (as if they were not a principal driving force of that concentration). (Cf. CFTC Commissioner Dan Berkovitz Wants Agency to Focus on Competition and Position Limits.)

Staying with the difficulties that will be created by a fifty-state regulatory regime, Commissioner Jackson’s dissent to the adoption of Regulation Best Interest was particularly disappointing. The Commissioner favored an even stricter regime imposed on broker-dealers than Regulation Best Interest provided. However, rather than accept the disappointment of the outcome, and perhaps win the day in another administration, he essentially advocated for each state to go its own way. While this may provide the Commissioner with what he believes to be a victory on this issue, the overall effect on the U.S. economy of this victory and others of a similar nature, not only in the area of financial regulation, is extremely damaging. In effect, it is advocating for a mini-Brexit, with each jurisdiction establishing its own regulatory regime, and so losing the benefit of a single unified market operating under a consistent sent of rules.

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