As the securities industry asks the SEC to use pending broker-conduct regulations to make an end run around a host of tough, new state fiduciary rules on the horizon, state regulators are telling the SEC to stay out of their rulemaking activities.
In a new letter, the North American Securities Administrators Association (NASAA) told the U.S. Securities and Exchange Commission that the argument that the SEC can preempt state rulemaking is “fundamentally flawed.”
NASAA President Michael Pieciak who said he wrote the letter in response to a legal analysis by SIFMA, a securities industry group, that urged the SEC to use its “Regulation Best Interest” proposal to assert far-reaching federal preemption over state authorities when it comes to regulating broker-dealers.
Such a federal preemption would likely result in far less investor protection, not to mention a complete usurpation of states’ rights, critics say. But the securities industry has argued brokers need to be regulated by one set of rules, not a mix of rules that vary by state.
The SEC’s best-interest proposal has none of the sweeping fiduciary protections for brokers’ clients that Massachusetts and Nevada are advancing, or which New York has finalized for annuities products, NASAA argued.
The SEC’s proposal, for example, doesn’t require brokers to act as fiduciaries and put investors’ best interests first. Instead, the agency would codify Finra's suitability standard, which allows brokers to sell investors more expensive products and does not require fee disclosure.
The SEC “should decline to take up SIFMA’s suggestions” for a host of legal reason, Pieciak said.
“While it is not our purpose here to fully debate the merits of SIFMA’s preemption analysis, a cursory review demonstrates the analysis is erroneous,” he added.
SIFMA's arguments rests on the National Securities Markets Improvements Act of 1996 (NSMIA), which says that a state law is invalid only if “compliance with both federal and state requirements is impossible” or if the state law “poses an obstacle to the accomplishment of Congress’s objectives” in enacting the federal law.
NASAA, however, argued the fiduciary regulations being advanced by Nevada and Massachusetts are “a valid exercise of state regulatory authority” because neither make it impossible to comply with both state and federal securities law.