The consensus in the brokerage business is that when the Securities and Exchange Commission rolls out its Regulation BI (Best Interest) later this year it will prove to be far more workable than the now-dead Department of Labor's fiduciary rule, no matter how imperfect it is.
But what if various states decide to introduce their own fiduciary rules and best-interest standards, creating a landscape of numerous and different regulations resembling the life insurance industry, which is regulated by the states, not federal agencies.
Mark Quinn, director of regulatory affairs at Cetera Financial Group, and others raised precisely that prospect at the FInancial Services Institute's annual OneVoice conference in New Orleans on Tuesday. Noting that at least three states, New Jersey, Maryland and Nevada, already are proposing their own fiduciary standard, Quinn said the unveiling of a new best-interest standard by the SEC could open, not close, the debate over future securities regulation.
"What the SEC does could be less and less relevant," said another compliance expert. The SEC has yet to issue a firm proposal but its hearings and discussion of Reg BI have met with a firestorm of criticism from consumer groups, arguing the language that the SEC is discussing could leave many consumers confused.
Moreover, it took the DOL six years after the Dodd-Frank bill was passed to create a fiduciary rule. After the Trump Administration took office it had other priorities and took over a year to overturn the DOL's rule. How long it will take to enact Reg BI remains an open question, but the SEC has displayed consistent weakness and lack of interest on the issue for most of the last decade under both the Obama and Trump administrations.
SEC commissioners, if you haven't noticed, tend to be Ivy League experts in corporate securities laws. For these bigtime lawyers, the problems of ordinary retail investors apparently are boring and pedestrian.
States aren't waiting. New Jersey Governor Phil Murphy, a former Goldman Sachs partner, has vowed to enact a fiduciary rule in his state. When New Jersey held hearings in Trenton, the state capital, officials from FSI attended to testify against the concept, but they were outnumbered by numerous consumer advocates.
FSI officials took some credit for sidetracking a similar proposal in Maryland, but other sources said a new report recommended the state legislature enact such a rule.
Executives in the IBD world voiced fears of a patchwork quilt of different rules open to different interpretations. One executive at FSI's OneVoice cited a Rand Corporation survey asking consumers what they thought the word "fiduciary" meant.
The most common interpretation among consumers was that fiduciary meant "don't lose money," she said. When the next bear market comes, an aggressive plaintiff's bar could embrace a liberal interpretation of various different state rules.