(Forbes) -- Another state is stepping into the fiduciary arena as Maryland recently introduced a bill that intends to create a level playing field for professionals who provide investment advice.
Four Democratic state senators, Jim Rosapepe, Susan Lee, Bill Ferguson and Mary Washington, proposed Senate Bill 786- Financial Consumer Protection Act of 2019 before the general assembly on Feb. 4, 2019.
Similar Legislation
The 50-page bill is similar to what New Jersey, Nevada and Connecticut have taken on as needed protection in investment advising.
Imposing fiduciary responsibility would require all investment professionals to place a client's interests above their own when recommending investments.
Although New Jersey's Department of Labor rule was vacated, New Jersey's Bureau of Securities intends to impose fiduciary duty on all investment professionals. The New Jersey Division of Consumer Affairs published a pre-proposal notice in October 2018.
Similarly, in 2017, Nevada implemented a fiduciary duty on all broker-dealers and advisors who give advice to clients based in Nevada. Connecticut also passed a bill requiring service providers to disclose conflicts of interest to a plan's fiduciaries for some Connecticut-based organizations' 403(b) plans not covered by the ERISA of 1974.
Unlike these three states, Maryland takes the view of investor protection one step further, closing the gap between the DOL's now-defunct fiduciary rule and the current Regulation Best Interest (RBI) proposal by holding all individuals in a financial advising role to the same fiduciary standard.
Details of Maryland's proposed fiduciary bill
The proposed Senate Bill 786 contains vast coverage with the purpose of strengthening and establishing protections for consumers in certain areas of financial transactions, including financial institutions, real property and commercial law. The proposed bill intends to hold broker-dealers, insurance agents and other agents in a financial advising role to the high fiduciary standard currently in place for RIAs.
Section 5 of the bill specifies who would hold fiduciary responsibility, including broker-dealers, broker-dealer agents, investment advisors, federal-covered advisors, investment advisor representatives as well as insurance providers.
According to the bill, an insurance provider is anyone who receives compensation for selling, soliciting or negotiating the renewal or continuation of insurance contracts.
The bill further defines insurance contracts that include nonprofit health service plans, dental plans and health maintenance organizations.
As section 5 states: "A person subject to this section is a fiduciary and has a duty to act in the best interest of the customer without regard to the financial or other interest of the person or firm providing advice."
What sets Maryland's bill apart
The proposed bill follows congressional intent in requiring financial professionals to act in the best interest of the customer and sets an appropriately high standard of conduct for professional advice.
The inclusion of insurance agents makes Maryland's proposal stand out among the other state’s bills to cover what is seen as an unfair terrain for investors.
The inclusion of insurance agents is commendable, as these individuals can recommend opaque, illiquid and high-cost investments that would be otherwise illegal under securities laws. Maryland's proposed bill ensures investors are protected from conflicts of interest that create revenue for those in financial advising roles.
Similarly, Maryland is the first state to pick up where the SEC failed in investor protections when the fiduciary rule was defeated in the 5th Court of Appeals. The SEC's newest attempt, the RBI proposal, states that broker-dealers and investment advisors must inform the investor which category they fall under.
However, the RBI proposal continues to maintain a separate standard for broker-dealers than the current high standard for investment advisors. Also, investors are left to understand the differences between broker-dealers and investment advisors for themselves, as well as the cost structure.
What is in the future?
The industry needs to face the consequences of not having a uniform fiduciary rule that can provide meaningful protection for consumers. Industry professionals argue that investors will be confused by a myriad of differing state bills and believe the rules governing brokerage and advisory industries should be imposed on a national level. Yet the defeat of the DOL's fiduciary rule has brought about states taking things into their own hands.
The question becomes: does Maryland's bill do what it intends? While the Maryland bill is a good example for other states, investors will be further confused by a patchwork of regulations that differ from state to state. Investors with multiple accounts at dual registrant firms will find it nearly impossible to keep up with all the regulations, and advisor firms that are in multiple states will confront expensive and confusing compliance requirements. An ideal situation would be a strong uniform federal standard.
The SEC is the best entity to implement a strong national regulation standard, yet the recent RBI proposal falls far short in protections for investors.
The lack of clear and high standards for all agents in financial advising roles at the federal level will continue to force states like Maryland to take on investor protection and cover what SEC's RBI bill lacks: fiduciary responsibility for all individuals in financial advising roles.
