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Maryland Takes on the SEC in Debate Over Fiduciary Standard of Care

The Maryland legislature may soon be considering legislation that would require Maryland-licensed broker-dealers (“brokers”) to abide by a fiduciary standard of care when recommending stocks, bonds and mutual funds to Maryland consumers.  Similarly, under the same contemplated legislation, Maryland-licensed insurance agents would be required to abide by a fiduciary standard of care when recommending insurance products to Maryland consumers. (See Senate Bill 786, which was introduced on February 4, 2019). If this legislation is enacted, the effect would be that brokers and insurance agents would have to determine if their recommendation is in a consumer’s best interest before presenting that recommendation to the consumer.     

On its face, the contemplated legislation seems like a good idea.  After all, why shouldn’t Marylanders receive advice on stocks, bonds, mutual funds and insurance products that is in their best interest? The issue, however, as I will explore in this article, is not whether increasing the standard of care for brokers and insurance agents is a good idea. Consumer and industry groups agree that the current standard of care (suitability) needs to be raised to better protect Americans’ savings. The underlying issue is whether Maryland, or any state for that matter, is the appropriate regulator to enforce a higher standard of care (a fiduciary or best interest standard) or whether legislation or regulation of this higher standard at the national level is a better approach.    

The Maryland Senate bill follows the actions of at least three other states that have recently enacted fiduciary legislation or are contemplating doing so.  Since 2017, Nevada, New Jersey and New York have enacted, or are considering enacting, legislation that would impose a fiduciary standard of care on brokers (interestingly, these states have not proposed extending the fiduciary standard on insurance agents as has Maryland). These state initiatives followed the failed effort in 2016 by the U.S. Department of Labor (“DOL”) to impose a fiduciary duty on any financial professional who, for compensation, manages or provides advice on retirement plans. A federal appeals court ruled last year that the DOL had encroached on the jurisdiction of the U.S. Securities and Exchange Commission (“SEC”), which is charged with regulating brokerage transactions and investment advice. Since then, in response to a growing swell of consumer groups advocating for increased measures to protect the savings of consumers, the SEC proposed “Regulation Best Interest” to, among other things, increase protections for consumers by requiring brokers to mitigate or eliminate conflicts of interest. 

Reasonable arguments can be made on both sides of the debate whether individual states or the federal government should be the enforcer of a heightened standard of care for professionals who manage their client’s savings.  Those who advocate that it should be each state’s responsibility to protect the savings of consumers cite the inadequate measures of federal regulators over the last 20 years to address the conflict of interest presented by a broker whose recommendation may be influenced by the commission he/she will earn. The obvious disadvantage of state regulation is the potential for differences in standards from one state to the next. While federal regulation would address that problem by offering a standardized approach, the concern of states that have developed their own fiduciary regulation (Maryland included) is that the federal government would dilute the state standard by, for example, not using the word “fiduciary” in the SEC’s proposed “Regulation Best Interest.” 

The financial services industry has historically been characterized by layers of state and federal regulations and self-regulatory rules, and multiple government agencies with overlapping jurisdictions.  It appears this approach to regulating conduct will continue.  Consequently, if the Maryland legislation becomes law (and all indications are that it will), firms whose representatives are brokers and insurance agents will need to revise their policies and procedures to achieve compliance with the new law. 

Michael P. Shaw, Esq. is a corporate and regulatory attorney at Niles, Barton & Wilmer, LLP, focusing on serving the legal, compliance and enforcement defense needs of registered investment advisers, broker-dealers, hedge funds, private equity firms, and insurance agencies.

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