Recent State Fiduciary Duty Developments

September 1 marked the deadline for enforcement of the Massachusetts regulation on the fiduciary standard for securities recommendations. The regulation went into effect in March 2020. It is widely anticipated that enforcement steps will begin in the near future and that the Massachusetts Securities Division will be aggressive in seeking compliance with the new requirement.

View a copy of the updated state chart.

Reg BI Is Here. What’s the SEC Doing Now?

Reg BI has passed its compliance date of June 30, 2020. The SEC and FINRA have commenced examinations to test brokerage firms’ good faith compliance with Reg BI and Form CRS disclosure satisfaction. Our article “Have No Fear, Reg BI Is Finally Here” provides a brief overview of Reg BI and deciphers its implications for brokers and broker-dealers. It also provides an overview of a recent Risk Alert drafted by the SEC’s Office of Compliance Inspections and Examinations (OCIE), and examines the SEC’s and FINRA’s review of Reg BI compliance.

Read the article.

Comparing the Standard of Conduct: Broker-Dealers vs. Investment Advisers

The SEC’s standard of conduct for broker-dealers under Regulation Best Interest (Reg BI) became effective on June 30, 2020. While registered investment advisers (RIAs) always have been subject to a best interest standard of conduct (i.e., the overarching standard that encompasses both the duty of care and the duty of loyalty), the SEC’s clarification of that standard in its Interpretation Regarding Standard of Conduct for Investment Advisers (the RIA Interpretation) has  been in effect since July 12, 2019. There are similarities in these two standards, but there are significant differences as well. Here is how the two standards compare:

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Recent State Fiduciary Duty Developments: Arizona Enacts Best Interest Standard

Arizona has become the second state after Iowa to enact a best interest standard for the sale of annuities. Like the Iowa law, both of which become effective January 1, 2021, Arizona’s law is modeled after the National Association of Insurance Commissioners (NAIC) model regulation. The new law requires insurance producers to “act in the best interest of the consumer under the circumstances known at the time the recommendation is made, without placing the producer’s or the insurer’s financial interest ahead of the consumer’s interest.”

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The Second Circuit Upholds Reg BI

On June 26, 2020, the U.S. Court of Appeals for the Second Circuit issued its ruling on the challenge to the legality of the Regulation Best Interest final rule (Reg BI), promulgated by the U.S. Securities and Exchange Commission (SEC) under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. As reported on June 2, 2020, the Second Circuit entertained oral argument. It issued its ruling late in the day on June 26, just prior to Reg BI’s June 30, 2020, implementation date two business days later.

The Second Circuit’s ruling had three holdings: (1) the individual investment adviser petitioner had standing to bring the petition to review, but the state petitioners did not; (2) section 913(f) of the Dodd-Frank Act authorized the SEC to promulgate Reg BI; and (3) Reg BI is not arbitrary and capricious under the Administrative Procedure Act (APA). We focus the analysis herein on the latter two holdings.

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The Second Circuit Hears the Reg BI Challenge Oral Argument

A three-judge panel of the Second Circuit entertained arguments on June 2, 2020, in a lawsuit seeking to vacate and set aside the Securities and Exchange Commission’s (SEC’s) Regulation Best Interest (Reg BI). By way of background and in brief summary, Reg BI requires that broker-dealers make recommendations that are in the “best interest” of the retail customer, disclose conflicts of interest, and specify the services customers are receiving and the associated costs. As previously covered in this blog, the plaintiffs initially challenged Reg BI in September 2019. Despite this pending legal challenge and brokerage firms’ strained resources due to the pandemic and quarantining, SEC Chairman Jay Clayton said on April 2, 2020, in a public statement that the June 30, 2020, compliance deadline for Reg BI would remain.

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States Enact Good Samaritan Broker Laws

On January 22, 2016, the members of the North American Securities Administrators Association (NASAA) released the Senior Model Act.  It was developed and approved to serve as a model statute for states to adopt to target financial exploitation of seniors and to shield from liability brokers and brokerage firms who acted to assist those seniors. The Senior Model Act comports with a multitude of legislation and regulatory protection for seniors. Broadly stated, the Senior Model Act proposes language for legislation that would require “qualified individuals” such as broker-dealers and investment advisers, and those who work in a supervisory or legal capacity for them, to report any suspicions of financial elder abuse. The Senior Model Act proposes the protection of “eligible adults,” defined as those over the age of 65.

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Recent State Fiduciary Duty Developments

The Iowa Insurance Division has adopted the insurance producer portion of the rule for its proposed best interest standard for annuity sales, effective January 1, 2020. In response to comments, the Division elected to postpone the rule’s application to securities professionals, indicating that it intends to publish new rulemaking for the securities industry later this summer.

See the updated state chart.