The current President of the North American Securities Administrators Association (NASAA) and Vermont’s Financial Regulation Department Commissioner, Michael Pieciak, in a July 26, 2019 comment letter to the Massachusetts Securities Division, applauded the Division for its solicitation of public comments on a preliminary rule proposal providing a fiduciary standard for both broker-dealers that provide investment advice and for investment advisers. Pieciak admired the Division’s contention that the proposal is needed to protect Massachusetts investors because the SEC’s recently adopted Regulation Best, while “helping with relationship and conflict disclosures, cannot replace a clear fiduciary standard.”
Massachusetts’s proposal does not violate NSMIA. Pieciak forewarned the Division about industry groups that have already tried to disparage Nevada’s and New Jersey’s proposed fiduciary duty rules on federal preemption grounds, but he exclaimed that the states are on the correct side of this argument. Pieciak acknowledged that the National Securities Markets Improvement Act (NSMIA) does contain certain provisions preempting state regulation, but he stated that industry’s interpretation of these provisions as a "broad preemption" is an overreach. And he backed up this assertion with the following principles:
- Exchange Act Section 28(a) provides that state securities laws are preempted only to the extent they conflict with federal securities laws.
- Under basic conflict preemption theory, a state law is invalid only if "compliance with both federal and state requirements is impossible."
- Congress intended NSMIA to have only limited preemptive power. Concerning broker-dealers, for example, NSMIA preserved the states’ right to regulate broker-dealers in all areas except capital, custody, margin, financial responsibility, record keeping, bonding, and financial reporting requirements.
Applying the above principles, Pieciak argued that Massachusetts’s preliminary rule proposal is a valid exercise of state regulatory authority because, as written, it does not obstruct Congress’s preemptive intent (since it does not tread upon the above-mentioned NSMIA-preempted broker-dealer areas). Therefore, the preliminary rule proposal, by not regulating these NSMIA-preempted areas, makes it possible for broker-dealers and investment advisers to comply with them and federal securities laws simultaneously.
Pieciak lastly declared the validity of the preliminary rule proposal by noting that Congress, through NSMIA, never preempted the states from regulating conduct standards. Moreover, he remarked upon how broker-dealers already owe fiduciary duties in certain circumstances under both federal and state law when they exercise discretion over customer accounts or otherwise assume positions of trust and confidence with their clients.
Pieciak lastly declared the validity of the preliminary rule proposal by noting that Congress, through NSMIA, never preempted the states from regulating conduct standards. Moreover, he remarked upon how broker-dealers already owe fiduciary duties in certain circumstances under both federal and state law when they exercise discretion over customer accounts or otherwise assume positions of trust and confidence with their clients.