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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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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.

State Fiduciary Duty Developments: Massachusetts Moves Ahead with Fiduciary Standard

The Massachusetts Securities Division has issued an amended version of its proposed fiduciary standard for financial advisors. The original proposal was released in mid-June.

The amendment adds definition to the standard by including a detailed list of requirements as described in Faegre Drinker’s updated state law chart. The absence of this type of description has been a major criticism of other attempts at adopting a fiduciary standard for financial advisors.

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Nevada Proposes Fiduciary Regulations

Nevada has released a proposed regulation to regulate broker-dealers and their advisors as fiduciaries. In 2017, the state amended its securities law to provide that broker-dealers and investment advisers owe a fiduciary duty to their customers, but the change didn’t provide details on what that meant. Instead, the legislation required that a regulation be issued to explain and implement the change. Nearly a year and a half later, a proposed regulation has been released.

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Fiduciary Status for the Unwary

If you thought that avoiding fiduciary status would be a slam-dunk after the “new” DOL fiduciary advice rule was vacated, think again. The DOL’s old fiduciary regulation is back and it casts an unexpectedly wide net.

Let’s start with the background. The reinstated fiduciary definition says that a broker-dealer and its advisor (a “broker”) are fiduciaries to a plan if a functional five-part test is satisfied: (1) the broker provides advice about investments for a fee or other compensation, (2) on a regular basis, (3) under a mutual understanding, (4) that the advice will form a primary basis for the plan’s decisions, and (5) that the advice is individualized based upon the plan’s particular needs. For this purpose, a “plan” includes not only an ERISA plan, but also an IRA. (In the context of IRAs, being a fiduciary under the five-part test does not itself implicate a standard of care, but does apply to the applicability of certain prohibited transactions.)

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Drinker Biddle Launches Best Interest Compliance Team

As discussed regularly on this blog, the financial industry has seen a stream of rules and regulations in recent years that relate to the standard of care and management of conflicts for broker-dealers, investment advisers, insurance agents and companies.

The need for experienced counsel to help navigate the evolving and overlapping federal and state “best interest” obligations has increased. It’s the reason we’re excited to announce the launch of our Best Interest Compliance Team.

This interdisciplinary group of more than 20 lawyers consists of attorneys with experience across Investment Management, ERISA, SEC & Regulatory Enforcement Defense, Litigation/FINRA Arbitration, and Insurance Regulatory and Transactional practice areas.

The Best Interest Compliance Team will help clients make decisions about questions such as:

  • What does the SEC’s proposed Regulation Best Interest mean?
  • How does the SEC’s RIA interpretive guidance impact the standards currently applied to RIAs?
  • What is the effect of the court order vacating the DOL’s Fiduciary Rule and what already-implemented changes will continue under the SEC proposals for RIAs and broker-dealers?
  • How should written supervisory procedures be revised in light of these changes and proposals?
  • What measures should be taken to show good-faith compliance with the DOL’s non-enforcement policy?
  • Where should broker-dealers/RIAs/insurance companies go from here?
  • How should insurance agents deal with conflicting state regulatory schemes?

To learn more about the new Best Interest Compliance Team, read our press release or visit our team page on the Drinker Biddle website.