By Rita Raagas De Ramos
December 6, 2019
States pursuing fiduciary rules for broker-dealers run the risk of driving brokerage businesses away from their jurisdictions, ultimately hurting retail investors, according to Sifma president and CEO Kenneth Bentsen.
Meanwhile, broker-dealer firms are busy preparing to comply with the SEC’s Regulation Best Interest package and the costs are running into the “eight-figure” range for some firms, he said.
Unhappy with Reg BI, Nevada, New Jersey and Massachusetts are currently in varying stages of producing fiduciary rules for financial professionals, including brokers.
“What’s going to happen and what firms have reported to us is that rather than create multi-state compliance models and take on additional compliance liability, they will just go to the common denominator, which in many cases will just be: ‘We just won’t do brokerage in that state,’” Bentsen said Thursday at a media briefing.
“And the impact of that — which we saw in the now-defunct DOL rule — is the clients will basically have one service they can buy, which in many cases will be buying more services than they wanted, and therefore have to pay more than they wanted to,” he added.
Bentsen said the biggest difference with what the states are pursuing compared with Reg BI is the “duty of care” that states want to impose on broker-dealers.
“The SEC and Reg BI doesn’t [do that] because one of the attributes of Reg BI, in recognizing the need to maintain the brokerage model, is that it’s more of a point-of-sale type structure as opposed to an ongoing structure,” he said.
“There is an ongoing service you can buy and that’s the advisory model that all of our members [who are dually registered] offer,” he added.
Reg BI requires brokers to comply with the best interest standard when making a recommendation of any transaction or investment strategy involving securities to a retail customer. The SEC set June 30, 2020 as the compliance deadline for the implementation of the rule, which the regulator believes gives “sufficient time” for firms to comply with the requirements.
States should not shoehorn broker-dealers — Sifma
Bentsen said it’s wrong for the states to try and “shoehorn the brokerage model into an advisory construct.”
He noted that the approach didn’t work with the DOL rule, which was ordered vacated by an appeals court.
“Our overarching message to all of the states is first of all … Congress has long deemed that the capital markets are federal markets and in almost every case have preempted the states, so we have a national markets system,” Bentsen said. “And frankly that’s very much a hallmark and a reason why U.S. capital markets are as strong as they are.”
Bentsen said the states should examine Reg BI in earnest before dismissing it as ineffectual.
“We suggested to the states [that they] really need to take a step back and take a look at Reg BI and not let this discussion be colored by the fact that some people might think that Reg BI is lacking, because it’s not,” Bentsen said.
“It is an extremely robust and strict standard that the firms are going to have to comply with,” he added. “Remember, almost all Sifma members, if not all, are dually registered, so they are already operating in many instances as a ‘40 Act fiduciary for their clients.”
Bentsen noted that Finra “has, long before Reg BI, really been interpreting suitability in a fiduciary manner and arbitration cases have almost always been brought on a fiduciary claim.”
The Sifma executive stressed that he is not against advisory businesses, reiterating that many of their members are dually registered as broker-dealers and RIAs.
“There’s nothing wrong with advisory accounts. Again, almost all of our members are in advisory businesses. It’s an important business, but it’s not right for every account and it’s not right for every client, and it does cost more because you’re buying more whether you need it or not. So that’s a problem,” he said.
States should conform with Reg BI, not Fiduciary Rule — Sifma
Bentsen said Sifma met with state regulators on Wednesday about this issue.
“You know, they obviously have to look at it from the standpoint of their own rules and how their rules, just like state laws, comport with federal laws,” he said.
“And many of the state laws are currently based on suitability. They should look at making sure their laws conform with Reg BI but not to create something that’s different from Reg BI, which is going to create a patchwork [of rules] that at the end of the day is going to be, we believe, to the detriment of the client. And that that doesn’t make any sense,” he added.
Millions of dollars spent on Reg BI compliance
With regard to the preparations to comply with Reg BI, Bentsen said Sifma’s members are busy at work and spending a lot.
“They are doing a tremendous amount of work, as we would expect, to be ready to comply in June, particularly the larger members that have hundreds of people who are dedicated solely within the firms to setting up the compliance regimes, education protocols for their for their advisors and staff, and all of that,” he said.
“The cost is, you know, certainly approaching the eight-figure number for firms and so it’s a heavy lift,” he added.
Bentsen said the preparations and cost to comply with Reg BI shows the new rule isn’t as easy for brokers as critics have claimed.
“This is a real deal. This is not just some rule that some of the critics said it is. This is a very robust rule firms have to be prepared to comply with and they’re taking the steps to do it,” he said.
What’s happening in the states?
Nevada passed and signed into law its Senate Bill 383, subjecting broker-dealers and advisors — effective July 1, 2018 — to the Nevada Revised Statute for financial planners, NRS 628A. The law effectively imposes a statutory fiduciary duty on broker-dealers and advisors to act in the best interest of their clients and comply with disclosure requirements. Nevada is working on the fiduciary rule it proposed in January.
In April, New Jersey proposed a fiduciary rule that requires all investment professionals registered with its Bureau of Securities to act as fiduciaries to their customers when providing investment advice or recommending an investment strategy; when opening or transferring assets to any type of account; or the purchasing, selling or exchanging of any security.
In June, Massachusetts sought comments on its proposal to apply a fiduciary conduct standard to broker-dealers, agents, investment advisors, and investment advisor representatives when dealing with their customers and clients. An amended proposal was unveiled last week, requiring financial recommendations and advice to be based on the best interests of the clients.
Tens of thousands of brokers and registered representatives stand to be affected by these pending state initiatives. There were 4,949 broker-dealer branches in New Jersey, 3,625 in Massachusetts and 1,278 in Nevada as of 2017, the latest data released by self-regulator Finra. Combined, those three states made up 6% of the total broker-dealer branches in the U.S. in 2017.
