The U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness (CCMC) has written to the SEC calling on the Commission to reiterate that the federal securities laws would preempt recent state proposals seeking to establish fiduciary or best interest standards. A federal standard such as the SEC’s proposed Regulation Best Interest would better serve and protect investors compared to standards that differ on a state-by-state basis, according to CCMC.
State proposals. CCMC took aim at proposals in Nevada and New Jersey that would implement new uniform fiduciary standards of conduct for broker-dealers and registered investment advisers. According to CCMC, these proposals, should they become law, would be preempted by the National Securities Markets Improvement Act of 1996 (NSMIA).
State proposals. CCMC took aim at proposals in Nevada and New Jersey that would implement new uniform fiduciary standards of conduct for broker-dealers and registered investment advisers. According to CCMC, these proposals, should they become law, would be preempted by the National Securities Markets Improvement Act of 1996 (NSMIA).
Under NSMIA, regulatory requirements imposed by state law on SEC-registered advisers are preempted, except those that relate to fraud, notice filings, and Investment Advisers Act fees. In particular, CCMC highlighted text from NSMIA that prohibits states from establishing certain requirements “that differ from, or are in addition to” those enshrined in federal law.
The Nevada Securities Division proposed new regulations establishing fiduciary duties for broker-dealers and investment advisers in January 2019. CCMC noted that the proposal states that it is meant to be “interpreted and apply in harmony” with NSMIA but added that this statement alone would not prevent federal preemption in light of the requirements of the proposal. Because the Nevada proposal would result in new financial responsibility and record-keeping requirements for broker-dealers, they would have to endure the added expense of obtaining more insurance coverage, according to CCMC.
In addition, the proposal would require that broker-dealers make and keep records beyond those required by federal law, CCMC advised. “Virtually all recommendations would result in an ongoing obligation to monitor and advise clients,” even for a one-time fiduciary recommendation, CCMC said. This would require the collection and documentation of all relevant information about the client.
CCMC also criticized the Nevada proposal for deeming as fiduciary advice certain acts not related to the recommendation of securities, such as recommending other advisors. In addition, CCMC noted that the Nevada proposal would put the burden on the broker-dealer to prove that an exemption to the fiduciary exists, another burden that NSMIA preempts states from imposing, according to CCMC.
Similarly, the proposal put forth by the New Jersey Securities Bureau last month would impose a uniform fiduciary duty for broker-dealers, investment advisers, and investment adviser representatives, CCMC observed. In fact, the proposed standard explicitly states that it would go beyond the scope of the SEC’s proposed Regulation Best Interest: “Should the SEC adopt Regulation Best Interest, the Bureau’s proposed new rule will exceed this standard,” CCMC quoted from the proposal. State laws that exceed the SEC standard must trip NSMIA preemption, CCMC implored.
Regulation Best Interest. The Commission’s proposed Regulation Best Interest, which the SEC approved for comment in April 2018 and is expected to be put to a final vote in the near future, represents an effort to provide comprehensive regulation of investment advice that will preserve retail consumer choice, including for the brokerage “pay-as-you-go” model widely used by small-money investors, CCMC asserted. Fiduciary and best interest standards adopted state-by-state will likely materially conflict with each other and with federal standards, resulting in increased compliance burdens, risks, and costs, CCMC warned. Therefore, the SEC should reiterate that state fiduciary proposals such as those put forth by Nevada and New Jersey would be preempted by federal law under NSMIA, CCMC concluded.
The Nevada Securities Division proposed new regulations establishing fiduciary duties for broker-dealers and investment advisers in January 2019. CCMC noted that the proposal states that it is meant to be “interpreted and apply in harmony” with NSMIA but added that this statement alone would not prevent federal preemption in light of the requirements of the proposal. Because the Nevada proposal would result in new financial responsibility and record-keeping requirements for broker-dealers, they would have to endure the added expense of obtaining more insurance coverage, according to CCMC.
In addition, the proposal would require that broker-dealers make and keep records beyond those required by federal law, CCMC advised. “Virtually all recommendations would result in an ongoing obligation to monitor and advise clients,” even for a one-time fiduciary recommendation, CCMC said. This would require the collection and documentation of all relevant information about the client.
CCMC also criticized the Nevada proposal for deeming as fiduciary advice certain acts not related to the recommendation of securities, such as recommending other advisors. In addition, CCMC noted that the Nevada proposal would put the burden on the broker-dealer to prove that an exemption to the fiduciary exists, another burden that NSMIA preempts states from imposing, according to CCMC.
Similarly, the proposal put forth by the New Jersey Securities Bureau last month would impose a uniform fiduciary duty for broker-dealers, investment advisers, and investment adviser representatives, CCMC observed. In fact, the proposed standard explicitly states that it would go beyond the scope of the SEC’s proposed Regulation Best Interest: “Should the SEC adopt Regulation Best Interest, the Bureau’s proposed new rule will exceed this standard,” CCMC quoted from the proposal. State laws that exceed the SEC standard must trip NSMIA preemption, CCMC implored.
Regulation Best Interest. The Commission’s proposed Regulation Best Interest, which the SEC approved for comment in April 2018 and is expected to be put to a final vote in the near future, represents an effort to provide comprehensive regulation of investment advice that will preserve retail consumer choice, including for the brokerage “pay-as-you-go” model widely used by small-money investors, CCMC asserted. Fiduciary and best interest standards adopted state-by-state will likely materially conflict with each other and with federal standards, resulting in increased compliance burdens, risks, and costs, CCMC warned. Therefore, the SEC should reiterate that state fiduciary proposals such as those put forth by Nevada and New Jersey would be preempted by federal law under NSMIA, CCMC concluded.