Even before the SEC recently released its Regulation Best Interest rule for retail investment advisors and broker/dealers, there was talk of forthcoming court challenges.
NSMIA preemption has never been litigated, and until the issue is resolved, states can’t develop broader strategies.
State regulation of investment advisors was codified in the Securities Exchange Act, which gave states the power to regulate b/ds to protect clients from fraud. In 1996 NSMIA amended the act to limit states’ ability to regulate b/ds beyond federal requirements in regard to capital, custody, margin, financial responsibility, making and keeping records, bonding, or financial or operational reporting requirements.
The question of record keeping is crucial to the arguments critics make against state fiduciary standards. They argue that any enaction of a fiduciary standard on b/ds would require them to institute new supervisory systems and procedures in excess of the Exchange Act’s requirements. If states were not allowed to impose rules resulting in a need for record-keeping changes on the part of b/ds, they would effectively be disallowed from pursuing anti-fraud legislation – an intrinsic states’ right.
States have more actively enacted their own measures since the 5th U.S. Circuit Court of Appeals overturned the Department of Labor’s 2016 fiduciary rule last year. New Jersey, Nevada, Massachusetts, and New York are pursuing fiduciary standards exceeding Reg BI.
Threats of litigation will not likely keep states from moving to institute their own fiduciary standards, but whether the federal government would preempt state securities laws would be up to a court to decide.
For more information, please read:
The Coming Legal Challenge to State Fiduciary Standards | Wealth Management