State Leaders at Odds With Securities Regulators on Fiduciary Rule

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By Sean Forbes

July 27 — Governors and state legislators are generally opposed to the Department of Labor's proposed conflict-of-interest rule, putting them at odds with their securities regulators.

State leaders generally called for more consultation and cooperation with the DOL, or even shelving the proposal (RIN 1210-AB32) in favor of a congressional bill to address the definition of fiduciary advice.

Dan Crippen, executive director of the National Governors Association, requested in the NGA's brief letter additional time to give the DOL more opportunity to coordinate with the states. “Without adequate federal consultation with state leaders to help better understand the myriad of state laws currently in place to protection consumers, the proposed rule could have unintended consequences,” said the NGA letter, dated July 21, the deadline for initial public input on the proposal.

The NGA also called for the DOL to consult with state elected and appointed officials, including insurance regulators.

The National Association of Insurance Commissioners, the national standard-setting and regulatory support organization for the states and U.S. territories, indicated in its letter that it has been in talks with the DOL.

“In our discussions to date with DOL officials, we have greatly appreciated their insights on operationalizing a number of provisions of the rule, including the best interest standard, reasonable compensation requirements, sales of proprietary products, differences between educational activities and fiduciary responsibilities, and others. We also appreciate that DOL is open to suggestions on how to further clarify and provide certainty on a number of those areas to limit the potential for unintended consequences, confusion, or litigation,” the NAIC said.

The NAIC didn't make any recommendations, but said that it will “carefully evaluate” comments submitted during the period.

Iowa and Wisconsin

Iowa's governor, Terry E. Branstad (R), also said, that the DOL should work with state insurance commissioners, as well as with industry representatives and consumer advocates. However, Branstad went further than the NGA letter, saying that the DOL's proposal would limit the retirement choices Iowans have as well as their access to retirement education.

The “vast majority” of investor accounts are in brokerage accounts, so the proposal could “negatively impact” the relationships that account holders have with their brokers, Branstad said.

The proposal also would make it harder for small businesses to offer retirement plans, “a problem that might be significantly acute in rural areas,” Branstad said. The proposal would interfere with small businesses' ability to get advice on starting and improving their retirement plans, he said.

Wisconsin state assemblymen echoed some of Branstad's concerns, but also said that the proposal would limit the ability of low- and middle-income individuals to choose between fee-based financial advice and commission-based advice. If the proposal were to be finalized in its current form, individuals would be “forced” into fee-based advisory accounts, or to forgo advice altogether.

The proposal, therefore, would limit choice and raise costs, the legislators said. Congress, not DOL, should take the lead on fiduciary standards, they said.

“We believe that Congress should adopt a set of standards that preserve our constituents' access to current products and services at a price they can afford,” they said.

Securities Regulators

The North American Securities Administrators Association strongly supported the proposal, while also offering two primary suggestions. The first is that the DOL add language in a final rule saying explicitly that state securities laws aren't preempted. The other is that pre-dispute binding arbitration agreements should be prohibited from the proposed best-interest-contract exemption (ZRIN 1210-ZA25).

Section 514(b) of the Employee Retirement Income Security Act, known as the “savings clause,” provides that ERISA doesn't preempt state regulations on insurance, banking or securities.

“Explicit acknowledgement of the savings clause ensures that state enforcement actions can supplement the current remedies under ERISA” and the tax code, “which vary by type of plan,” NASAA said.

Regarding pre-dispute arbitration agreements, NASAA said that it agreed with the DOL's position that waivers for class actions shouldn't be part of the agreements, but remained concerned the regulation would allow the use of binding agreements for individual claims.

“Prohibiting binding, or mandatory, pre-dispute arbitration clauses would ensure retirement investors’ access to the courts, provide an important measure of investor protection, and uphold the original purpose of the Federal Arbitration Act,” NASAA said.

William F. Galvin, secretary of Massachusetts and the commonwealth's chief securities enforcer, also expressed strong support of the proposal, and echoed NASAA's recommendation that the DOL confirm that states still have primary authority over securities laws.

Galvin said that his support for the proposal was based on his experience in tackling “abusive” advice given to owners of individual retirement accounts.

“Many of the worst cases of abuse that my office has seen are instances where brokers have advised customers to roll over retirement assets into high-cost IRAs. In such cases, the investors' lack of expertise and their need for non-conflicted advice are tragically clear,” Galvin said.

The secretary cited three enforcement actions, involving abuses in IRA rollovers, in self-directed IRA accounts and in sales of alternative accounts.

In the case of the rollovers, Galvin said an agent of a major national brokerage firm had obtained a list of Boston Edison retirees and “aggressively cold called them.” The agent's pitch “included false promises and guarantees as well as misrepresentations about the safety of investing in the stock market and the returns he could generate,” Galvin added. The agent managed to convince the retirees to take lump sums and roll then into IRA accounts at the brokerage at which he worked, he said.

The agent also engaged in other abusive practices that led to losses for the retirees, Galvin said. After investigating the case and filing an enforcement action, the brokerage firm agreed as part of a consent order to repay the retirees for the losses they had incurred due to the agent's misconduct, he said.

The proposal is both “realistic and workable,” and because the financial industry “can be an innovative and dynamic industry,” it would be able to adjust to the new regulatory regime, Galvin said.

To contact the reporter on this story: Sean Forbes in Washington at

To contact the editor responsible for this story: Phil Kushin at

Copies of the letters are at: NGA (; NAIC letter (; Gov. Branstad (; Wisconsin lawmakers (; NASAA (; and Galvin (