Maryland Proposes Fiduciary Standard For Brokers, Insurance Agents

Maryland Proposes Fiduciary Standard For Brokers, Insurance Agents

FEBRUARY 8, 2019 • TRACEY LONGO, FA Magazine

Maryland has introduced legislation that would require both brokers and insurance agents to act as fiduciaries—a move that puts the state well in front of the best-interest advice standard the Securities and Exchange Commission has proposed.

The Financial Consumer Protection Act of 2019 makes both brokers and insurance agents fiduciaries with “a duty to act in the best interest of the customer without regard to the financial or other interest of the person or firm providing the advice.”

Registered investment advisors are included in the standard, but already operate as fiduciaries.

Maryland isn’t the first state to take such an action. Nevada, New Jersey and Washington also advancing their own fiduciary regulations, meaning industry lobbyists and consumer advocates are in for a busy 2019.

As with other state and federal proposals that would create a blanket fiduciary rule for all advisors, consumer groups are lining up in support, and industry groups are lobbying against approval.

“Ultimately, our preference is for a strong federal standard, so that the citizens in all states benefit,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “But, so far, we haven’t been offered a federal standard that meets that test. If the SEC doesn’t strengthen its standard, we will be looking to states to fill that gap.”

The biggest impediment to a stronger SEC standard has been brokerage industry opposition, Roper said. “If SIFMA and others start to realize that their intransigent opposition to a strong standard at the federal level is going to result in state actions, maybe they’ll be more willing to support a federal standard that actually strengthens protections for investors.”

As expected, industry opposition to the bill was immediate, with some lobbyists saying Maryland’s rule could create significant regulatory challenges for brokers, agents and their firms that serve clients in multiple states.

“We aren’t questioning the intent behind these proposals,” said Dale Brown, CEO of the FInancial Services Institute (FSI), which represents independent broker-dealers. “We’re questioning the wisdom of a state-by-state, nonuniform approach. That’s why we’re actively supporting a new uniform federal best interest standard. Most financial advisors, whether they’re FSI members who are duly-registered and operate under Finra and SEC rules, or are RIAs only, serve investors in multiple states.”

SIFMA, formerly the Securities Industry and Financial Marketing Association, also opposes state fiduciary initiatives until the SEC finalizes its Regulation Best Interest proposal, which SEC Chairman Jay Clayton said he expects to release by the second quarter.

“We have concerns with states being active while the SEC is moving ahead,” said Lisa Bleier, managing director and associate general counsel of federal government relations at SIFMA. “If each state comes out and works on its own fiduciary approach, that could inadvertently create conflicts and complexities for anyone operating in multiple states, including investors.”

Industry lobbyists also worry that as states make broker regulation essentially identical to advisor regulations, more broker-dealers and reps may give up their brokerage licenses and become pure RIAs. That could create a loss of members and revenues for industry associations and for their self-regulator, Finra.

Such a migration, spurred by regulation, could also create a dearth of investment professionals and firms willing to work with middle class investors, industry officials said.

“Will more and more firms say there is no point in retaining a brokerage license?” Bleier asked.

The American Council of Life Insurers is also opposing the Maryland legislation.

“We strongly urge the legislature to think twice about a bill that would do more harm than good to the Marylanders it is intended to benefit,” said Bruce Ferguson, ACLI’s senior vice president of state relations.

History has shown that, when faced with a fiduciary standard, many firms eliminate commission-based services relied upon by individual investors with small accounts, he added.

The Maryland House of Delegates is scheduled to introduce its version of the Financial Consumer Protection Act of 2019 as early as Friday.

Roper expects the legislation, if adopted, will trigger court action.

“I think [the industry’s] first line of defense will be to try to overturn the state laws in court,” Roper said. “Contrary to their talking points, their real opposition is not to inconsistent standards, but to standards that actually seek to raise the bar in terms of investor protections.”