Illustration: Jonathan Djob Nkondo For Bloomberg Businessweek

The Battle Over Broker Rules Goes Local

(Bloomberg Businessweek) -- Ordinary investors face a confusing situation when it comes to sizing up the people doling out financial advice. Can they can be trusted to act in their clients’ best interests, or should they be treated with caution—like a car salesman?

It turns out either answer could be correct, depending on the adviser. A registered investment adviser works for a fee and has a fiduciary duty to make the client a priority. Others, such as traditional securities brokers, are held to a lower standard and might skew their advice based on the commissions they receive for selling mutual funds, annuities, and other products.

Following the financial crisis, Washington tried to clear up things by drafting a single set of rules for the entire industry. It failed repeatedly. Last year the Trump administration abandoned the initiative altogether. That, in turn, prompted lawmakers or regulators in several states to take matters into their own hands and push for fiduciary standards for financial advisers of various stripes.

Industry groups say this will add to complexity for investors. Financial-services companies and many brokers operate across state lines. All told, state-by-state rules “will result in a patchwork of conflicting conduct standards, resulting in investor confusion and ultimately less access to information and choice,” said Kenneth Bentsen, president of the Securities Industry and Financial Markets Association, in a written statement.

Nonsense, argues Aaron Ford, who, as majority leader of the Nevada Senate, wrote a fiduciary law under which new regulations are being drafted. Ford, who was recently elected Nevada attorney general, says one reason he backed the bill was an experience he had in private practice representing an elderly client who’d been ripped off by an insurance salesman. “Looking out for the interests of clients is not difficult or an unreasonable expectation,” he says. “I decided if the federal government wasn’t going to provide protection for Nevada citizens, as majority leader of the Senate I would.”

The federal government once seemed close to requiring most advisers to act in only their clients’ best interests. The Dodd-Frank Act of 2010 directed the Securities and Exchange Commission to render an opinion on whether retail investors were being well-served by rules allowing a broker to sell any product deemed suitable for a client—an easier bar to clear. The agency decided they weren’t. The following year it recommended creating a uniform fiduciary rule.

A half-decade later, the SEC still hadn’t acted. But under President Obama, the Department of Labor, which oversees pensions, made its own move. Pointing to a study that found “conflicted investment advice” costs the nation’s retirement savers $17 billion a year, it drafted a fiduciary rule that applied to advice given on retirement accounts. Because some firms said they would apply the standard to all accounts, the Labor Department rule was expected to trigger sweeping changes in the advice business. Some companies said they would move away from commission-based sales.

But no sooner had President Trump taken office than his administration indicated it had no intention of following through on the initiative. Instead, under Chairman Jay Clayton, the SEC last April announced plans to draft an entirely new broker standard. Running hundreds of pages, the SEC’s proposed Regulation Best Interest could do away with some of the industry’s most egregious practices—such as sales contests and quotas—and force brokers to spell out conflicts in plain language. It also falls well short of what fiduciary purists have called for.

Alabama Securities Commission Director Joe Borg, representing state regulators, wrote to the SEC in August lauding Regulation Best Interest as a good first step. But he also called for major modifications. Among them: Change the name from Best Interest to something more neutral, such as “Broker-Dealer Standard of Conduct,” to avoid misleading investors about what they’re getting. Borg says he’s not surprised some states are moving faster. “This is a hot topic, and the bottom line is that states are going to move when there’s political interest,” Borg says. “Personally, I prefer to wait and see what the SEC does.”

The SEC declined to comment. Agency critics, led by Democratic presidential candidate Elizabeth Warren, have panned Reg BI. “Wall Street might be excited about a green light to cheat working families, but it’s a bad sign for consumers,” she wrote in a Bloomberg column last August. Consumer advocates agree. “This is all about a weak and ineffective rebranding of the broker standard as ‘best interest,’ ” says Barbara Roper, director of investor protection for the Consumer Federation of America.

Leading the charge on the state level is New Jersey Governor Phil Murphy, a Goldman Sachs Group Inc. alum. His state’s securities bureau has declared it’s “considering making it a dishonest or unethical business practice” for a broker to behave like a salesman. It’s drafting a state fiduciary standard.

It’s unclear how the proposal—which has attracted dozens of forceful comments on both sides—will play out. Norm Politziner, an investment adviser representative in Highland Park, N.J., says his clients have only the foggiest notion that adviser standards are in play, and even he’s at a loss about what to expect. “If a client spends part of the year in New Jersey and part of it in Florida, what law applies?” he asks. “It’s hard to be compliant with two different agencies writing rules that may be in opposition to each other.”

To contact the editor responsible for this story: Pat Regnier at, Eric Gelman

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