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U.S. States Eye Protections for Investors if Federal Regulation Falters

The quality of retirement investment advice available to investors could well come down to where they live.

(The opinions expressed here are those of the author, a columnist for Reuters.)

CHICAGO, April 12 (Reuters) - Do you live in a fiduciary state?

The question could become important if the financial services industry wins its high-stakes legal and political battles to dismantle the federal fiduciary rule governing advice to retirement investors.

The U.S. Department of Labor rule requires financial advisors to act in the best interest of clients when advising on investments in retirement accounts. The rule pushes the market toward investor-friendly solutions such as low-cost index funds and unbiased fee-only advice. It discourages under-performing, high-cost products such as actively managed mutual funds and variable annuities.

But the future of the rule is uncertain. President Donald Trump ordered the DOL to conduct a new analysis of the rule aimed at revising or repealing it. In March, the U.S. Court of Appeals for the 5th Circuit in New Orleans voted to overturn the rule, and some experts expect its future could be decided by the U.S. Supreme Court. Meanwhile, The U.S. Securities and Exchange Commission is moving forward on a fiduciary rule affecting broker-dealers, and it is expected to be unveiled as early as this summer. The SEC this week set a meeting to discuss a standard of conduct for broker-dealers for April 18.

The turmoil is prompting some states controlled by Democrats to enact fiduciary rules of their own. Nevada lawmakers approved a law last July that extends an existing fiduciary law to include not only financial planners but stockbrokers and other commission-based investment representatives. Advisers also must disclose profits or commissions they earn on client investments.

Legislation also has been adopted in Connecticut; New York state and New Jersey are considering legislation. And the Maryland Senate recently approved legislation instructing its consumer protection agency to determine whether the state should enact a fiduciary law. Meanwhile, the National Association of Insurance Commissioners is considering ways that state regulators could use language contained in the DOL rule to regulate annuity sales.

Courts in four states - California, Missouri, South Carolina and South Dakota - have imposed fiduciary standards on broker-dealers. But courts in 14 other states have found that there is no fiduciary duty between brokers and clients.

Expect more state-level initiatives if Democrats succeed in taking over more statehouses and governorships this November, said James Watkins, a Georgia-based attorney who is an expert in fiduciary law and securities compliance. “If the mid-term elections lead to change in statehouses, we could see more of these bills,” he said.

Watkins notes that federal law does not supersede state powers. The Supreme Court has held that a state rule governs so long as it does not interfere with a retirement plan governed by the Employee Retirement Income Security Act (ERISA), he said.

“So long as states enact fiduciary laws that don’t impact a pension plan like a 401(k), they have every right to act,” he said.

High-Stakes Battle

Opponents of the DOL rule have long said they support a national best-interest standard, but argue that regulation should come from the SEC—an agency that dragged its feet on the issue for years. The Securities Industry and Financial Markets Association (SIFMA), a major trade group representing broker-dealers, banks and asset managers, often points to the fiduciary standards spelled out by the Financial Industry Regulatory Authority, the self-regulatory body, as the best model. Those rules apply a “suitability” standard, which is much weaker than the DOL “best interest” standard.

The financial services industry already is stepping up to fight any state-level initiatives. “Obviously, we would strongly prefer for states to defer to federal regulation,” said Kim Chamberlain, managing director and associate general counsel at SIFMA. “State legislation would be hugely problematic - it would be very difficult to train and supervise people if the rules differ from state to state on such a complex topic.”

Notably, SIFMA and other trade groups seem to concede that ERISA does not preclude states from taking action. They prefer to cite the National Securities Markets Improvement Act of 1996 (NSMIA), arguing that it limits the ability of states to create new record keeping obligations for broker-dealers and may contain other barriers to state action.

The battle over fiduciary standards is high-stakes. The DOL rule requires anyone advising clients on their retirement accounts to act in the client’s best interest and earn only “reasonable” compensation—and disclose information to clients about fees and conflicts. Investors can sue advisers who fail to meet those standards. An Obama administration study found that middle-class families are ripped off to the tune of $17 billion annually due to backdoor payments and hidden fees.

But the regulatory and legal melee continues. And depending on how the federal regulatory and court battles are settled, the quality of retirement investment advice available to you could well come down to where you live. So let me repeat the advice I always give to investors: protect yourself.

There is no reason not to insist that any advisor you work with accepts fiduciary responsibility.

An easy way to determine any adviser’s fiduciary commitment is to ask her to sign the Committee on the Fiduciary Standard fiduciary oath, a legally enforceable contract that commits advisers to put your interests first. Download the oath here: (

(Editing by Matthew Lewis)

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