State Roundup: States Take Action to Expand Fiduciary Duties
At the time of this writing, the fate of the Department of Labor’s Fiduciary Rule remains somewhat in limbo: despite the fact that the Department implemented, on June 9, 2017, the rule’s Impartial Conduct Standards and the expanded definition of who is considered a fiduciary, significant aspects of the rule are still unresolved, including the ultimate scope and content of the Best Interest Contract Exemption (BICE) and Prohibited Transaction Exemption 84-24. On August 31, the Department proposed an 18-month delay regarding the applicability of those two exemptions; if approved in final form, this would mean that the final rule is not going to take effect until July 1, 2019. Just what that “final” rule looks like remains to be seen: for instance, under what exemptive relief will fixed indexed annuities end up?
In the meanwhile, all four lawsuits challenging the rule are continuing to make their way through the courts. Oral arguments were held in the U.S. Chamber of Commerce case in the U.S. Court of Appeals for the Fifth Circuit in New Orleans on July 31. Court watchers anticipate a decision in that case soon, and any such decision could be a game changer. NAFA’s case before the D.C. Circuit is currently in the midst of its briefing schedule, as is the MSG case in the Tenth Circuit Court of Appeals. And, the Thrivent Financial Group’s case in the federal district court in Minnesota is moving ahead, as the Court there grapples with whether the Department’s recent concession that the rule’s prohibition against arbitration is contrary to the Federal Arbitration Act essentially “moots” that litigation.
Furthermore, moving on a parallel track, the NAIC has taken up the review and possible revision of the 2010 Suitability in Annuity Transaction Model Regulation, which could ultimately result in the creation of a “best interest”-type standard that might be applied to all annuity transactions, qualified and non-qualified.
In the midst of all this activity, a number of individual States have begun to consider the implementation of new or expanded fiduciary-related obligations. Nevada recently passed legislation, Nevada Senate Bill 383 (NV 2017 Session Laws, Ch. 322), effective July 1, 2017, which imposes a Fiduciary Duty on broker-dealers, sales representatives, investment advisors, and representatives of investment advisors who, for compensation, advise other persons concerning the investment of money. The definition of “financial planner” means a person who for compensation advises others upon the investment of money or upon provision for income to be needed in the future, or who holds himself or herself out as qualified to perform either of these functions’ is now revised to no longer exclude broker-dealers, IAs and RIAs; however, the definition of a “financial planner” still does not include insurance producers (see NRS §668C.212(2)(e)).
Also, both New Jersey and New York have introduced legislation which would mandate greater disclosure requirements for non-fiduciary “investment advisors,” which here is defined more broadly to include persons engaged in ‘retirement planning.’ (See NJ Assembly Bill 2979 (and companion bill NJ Senate Bill 2240) and NY Assembly Bill 2464). At this writing, these bills are all pending and are currently in committee. The New York and New Jersey proposed legislation is drafted very similarly, requiring oral and written disclosures stating, “I am not a fiduciary. Therefore, I am not required to act in your best interests and am allowed to recommend investments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks, and expected returns for you.” Clients would be required to acknowledge that such disclosure was made. Both the NJ and NY legislation include civil penalties of up to $5000 for any and each violation of the act.
Finally, Connecticut introduced legislation, Connecticut House Bill 7152, which would have required financial planners – defined here as any person who, for compensation, is engaged in the business of providing individual financial planning or investment advice with respect to 403(b) and 457 plans – to act in the best interest of their clients and to disclose conflicts of interest, but that bill died in committee. CT HB 7152 referenced the DOL Fiduciary Rule and would have required the Connecticut Department of Banking to adopt regulations “guided” by the rule.
Without regard as to what happens at the federal level with the DOL Fiduciary Rule, it seems clear that states are developing an appetite to get with – or perhaps get ahead of – the curve in casting a wider net in regard to who must meet a new Fiduciary Standard.