States Look to Help Investors, With Fiduciary Rule in Flux

The Labor Department is continuing to review the controversial Obama-era fiduciary rule to see if any changes should be made to it. Several states have decided they aren’t waiting for the outcome to try to protect some investors.

Connecticut, Nevada, New Jersey, and New York have passed laws or proposed regulations requiring investment advisers to disclose conflicts of interest to clients or to meet standards that their advice be in investors’ best interest. They’re similar to the fiduciary rule in that way, but they differ from the DOL’s regulation in that they don’t fall under the main federal benefits law, the Employee Retirement Income Security Act, or involve employer-sponsored retirement plans.

Practitioners say there could be some overlap between the federal law and the states’ efforts. That has fiduciary rule watchers monitoring the states closely to see how far they could go.

The action in the states is partially a response to the Trump administration’s delay of key provisions of the fiduciary rule until mid-2019. States have been taking the lead in other benefits-related areas of late, including introducing laws on paid leave and state-run retirement plans for those without access to one at work.

“The states are taking different approaches to what they see as some gap to investor protection. Nevada is potentially quite stringent. On the other hand, you have more disclosure- and disclaimer-based regimes that are percolating in New York and New Jersey,” George Michael Gerstein, counsel with Stradley Ronon in Washington, told Bloomberg Law.

Parts of the fiduciary rule that the DOL called the “least controversial” are already in effect, while key provisions remain under review until July 1, 2019. Supporters of the rule worry the DOL will weaken it. The Securities and Exchange Commission is also working on its own fiduciary standard that’s due out sometime this year. The SEC has the authority to impose a fiduciary standard on broker-dealers who give personalized advice on securities to retail investors.

The states may feel a sense of urgency with millions of baby boomers retiring and leaving the comfort of retirement plans protected ERISA, Fred Reish, a partner in Drinker Biddle & Reath LLP’s Los Angeles office, told Bloomberg Law.

People retiring are leaving their “fiduciary bubble-wrapped plans” and transferring money into individual retirement accounts and other products. “They’re going from fiduciary protections and institutional pricing to no fiduciary protections and retail pricing. There’s a lot of concern about that,” he said.

The Obama administration found in 2015 that a retiree receiving conflicted advice when rolling over a 401(k) balance to an IRA would lose an estimated 12 percent of the value of their savings if they withdraw funds from it over 30 years.

State Patchwork

The four states addressing the issue of fiduciary duty have all taken different approaches, some more stringent than others.

New Jersey’s proposal, the most recent from the four states, requires “non-fiduciary investment advisers” to disclose to clients that it isn’t mandatory they act in their best interest. The proposal was introduced in January in the Senate and referred to the State Commerce Committee.

New York state’s proposal, in the form of a rule, was rolled out in December and requires that life insurance and annuity sellers adhere to a “best interest” standard when selling these products. New York Gov. Andrew M. Cuomo (D) took a shot at the delayed DOL rule when announcing the proposed regulation, saying, “As Washington continues to ignore and roll back efforts to protect Americans, New York will continue to use its role as a strong regulator of the financial services and insurance industries to fight for consumers and help ensure a level playing field.” The state is accepting public input on the rule until later this month before it moves forward.

Connecticut’s and Nevada’s laws, both of which are in effect, have very different requirements. The Connecticut law only applies to state-run retirement plans.Nevada’s law, which went into effect last year, imposes a fiduciary duty on broker-dealers, sales representatives, and investment advisers who give investment advice. The state is now developing regulatory language that will put the law fully into effect.

The Nevada law was inspired by the Trump administration’s delay of the fiduciary rule, state Sen. Aaron D. Ford (D) told Bloomberg Law. Ford proposed the rule last year because of concerns that President Donald Trump and his administration “were trying to do everything to stop” the implementation of the fiduciary rule, he said.

There’s also been interest in other states, including California and Minnesota, but nothing has materialized.

ERISA Pre-emption

One question that arises with these laws is whether they will run afoul of ERISA provisions prohibiting states from passing laws that are similar to or conflict with the federal benefits law.

Nevada legislators considered the issue of ERISA pre-emption and aren’t concerned about it right now, Ford said.

“We think that we have crafted our bill such that there are no ERISA concerns we would have,” Ford said. If the regulation faced ERISA pre-emption issues, the Nevada legislature would revisit the legislation in the next session, he said.

Whether other states face an issue of pre-emption from ERISA and securities law rests in how proposals and laws are drafted, Lisa J. Bleier, managing director and associate general counsel with the Securities Industry and Financial Markets Association in Washington, told Bloomberg Law. Like ERISA, the National Securities Markets Improvement Act pre-empts states from enacting regulations that impose requirements that are new or different than those under the Securities and Exchange Act.

Regulatory Purgatory

Some practitioners think the states should wait for the DOL and SEC to settle their federal rules before going ahead with other laws targeting investor protections, especially given the patchwork quilt advisers would potentially have to deal with.

“We’re in a state of purgatory where we haven’t seen changes from the DOL yet, although we expect them. We haven’t seen anything from the SEC, but we know they’re working on it. It puts the industry in a tough spot right now,” Gerstein said.

The states seem interested in moving forward with rules related to the fiduciary duty because of a perceived lack of action on the federal level, Bleier said, but the DOL and SEC aren’t slowing down.

If the standard proposed by the SEC is “robust,” some states could back down, Reish said.

“If it comes out with a fairly weak standard, then I think the more Democratic states and those with larger urban population will continue to enact fiduciary rules,” he said.

To contact the reporter on this story: Kristen Ricaurte Knebel in Washington at kknebel@bloomberglaw.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bloomberglaw.com