Testimony of Knut A. Rostad, President & Co-Founder Institute for the Fiduciary Standard, March 13, 2019, to the Maryland Senate Finance Committee on SB 786 and House Economic Matters Committee on HB 1127 on Section 5.
Good afternoon. I am Knut Rostad, president and co-founder of the Institute for the Fiduciary Standard. The Institute is a nonprofit formed in 2011 to research, educate and advocate to advance fiduciary principles and practices. The Institute is proud to unabashedly advocate for real fiduciary duties. We do so in regulatory comment letters, op-eds, white papers and presentations for investors, advisors and policymakers. We do so in our Real Fiduciary™ Practices.
The Institute is honored to count among its supporters, many of the country’s leading scholars, former regulators and advisors. The Institute works nationally. I live locally –in Bethesda.
On the home page of the Institute’s website we feature, ‘Gail from Maryland’, in a three-minute video. Gail lives not far from here. She is accomplished, educated and smart – and scarred as a victim of abusive conduct from a financial rep. I salute Gail for her courage to tell her story. Watch our video. Listen to Gail. Keep her picture and story in mind as you proceed on a fiduciary rule.
Thank you, Senator Rosapepe and Delegate Cary for seeking to enact a state fiduciary duty. Here, I will address why it is vital that Maryland succeeds and why the arguments opposing such a rule have no merit.
First, Maryland must enact a fiduciary rule because the SEC, if it proceeds as planned, is virtually certain to fall very short of a real fiduciary standard based on state common law and the Investment Advisers Act of 1940. The Institute for the Fiduciary Standard letter to the SEC highlights proposed Reg BI’s serious flaws.
- The SEC’s proposed Reg BI is widely seen as very flawed at its core by virtually everyone and every group – except for BD and insurance firms. I.E: investment advisers, investor advocates, investors, state securities regulators and others.
- The state regulators, NASAA, in a Feb 19 letter to the SEC observed correctly Reg BI, “Would not require broker-dealers to eliminate any conflicts, neutralize compensation, or even generally recommend lower cost, less remunerative, or less risky products, to retail investors, (so) broker dealers naturally feel no pressure to do so.”
- Concerns over Reg BI are bi-partisan on the Commission. When the proposed regulation was introduced April 18, 2018, Republican Commissioner Peirce, called it “Suitability plus;” Democrat Stein, “Reg status quo.”
- Reg BI does not define best interest. There’s no best interest definition; no concrete guidance on policies and procedures to address conflicts. BDs have wide latitude to continue to do under RBI what they do now. As a result, ambiguity in Form CRS makes it incomprehensible, according to investors’ comments in the SECs roundtables. The SEC RAND report on the disclosure conceded RAND’s research, “Was not designed to objectively assess comprehension.” It was designed to gather “opinions” or assess likeability. (See Institute letter to the SEC )
- Reg BI, however, defines conflicts “benefits.” RBI worries the cost to “Establish, maintain and enforce written policies and procedures to mitigate or eliminate certain” conflicts may mean BDs drop certain services, forgo “some revenue stream.” RBI then worries customers will be harmed by not buying these products or brokers may not, “Expend effort in providing quality advice.” (See page 274).
- Reg BI does not adopt fiduciary principles and clear language that require rigor. The DOL Rule language on loyalty should be modeled by Reg BI. It states: “Investment advice is in the ‘‘Best Interest’’ of the investor when the Adviser and Financial Institution providing the advice act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity….without regard to the financial or other interests of the Adviser, Financial Institution or any Affiliate, Related Entity, or other party.”
- Reg BI does not require disclosure and mitigation have specific meaning. That the disclosure is affirmative and includes all specific and material facts of the conflict and their implication for the client; the adviser ensures it is timely and understood by the client; the client provides written consent that is informed, intelligent and independent; the transaction is fair and reasonable to the client. As Professor Tamara Frankel writes, “Courts will generally not enforce an unfair and unreasonable bargain.
Second, the objections of the brokerage and insurance industries to fiduciary rules are well-known. (For an overview of the SEC’s twenty-year struggle with conduct standards, see Consumer Federation of America letter, to the SEC, September 14, 2017. Also see the CFA letter.)
Industry objections are largely without merit. I do not say this lightly. I say this with respect to the abundance of evidence on the record — and after ten-years listening to industry objections and obfuscation, starting with the Obama June 2009 Treasury paper’s fiduciary proposal. At best these objections lack seriousness and substantiation. At worst they insult the intelligence of investors, policymakers and regulators. Here are six examples.
- The industry supports Reg BI. By all accounts, as noted above, Reg BI is a broker standard, not a fiduciary standard.
- The industry wrongly asserts a fiduciary standard means advice will be curtailed. …and offers no independent substantiation. Nonsense. Smaller investors abandoned by BDs providing incidental and conflicted advice can and are being serviced by IAs providing real fiduciary advice for a fee.
- The industry wrongly asserts a fiduciary standard means fewer choices. … and offers no independent substantiation. Nonsense. Poor choices of purveyors of expensive products will be reduced; better choices of advice with lower cost products will increase. The experience of the DOL rule before it was eliminated demonstrates the market will respond to a fiduciary duty. (See letter above. Also visit https://noincidentalinvestors.org/)
- The industry wrongly asserts federal preemption is an issue. As Consumer Federation and others wrote to Nevada’s Secretary of State’s Securities Division on March 1, “Industry groups incorrectly argue that the record to record-keeping in NSMIA precludes states from promulgating a fiduciary duty for brokers’ advice. They erroneously claim that any heightened state-based standard of conduct that may cause a firm to voluntarily keep a record that isn’t also required under federal law would be pre-empted. This is clearly wrong. States can and often do impose fiduciary duties on brokers in specific circumstances, despite the fact that there is no federal fiduciary duty for brokers.”
- The industry wrongly asserts state standards are unnecessary. At the November 2, 2018 conference regarding New Jersey’s proposed fiduciary rule, the Financial Services Institute, (FSI) said the SEC’s Reg BI makes state action unnecessary. The Securities Industry Financial Markets Association (SIFMA) urged New Jersey to NOT impose, “duplicative, different and / or conflicting conduct standards” because, SIFMA wrongly asserts, they will cause investor confusion. SIFMA urged New Jersey to let the SEC pass RBI, as “It is difficult to imagine what new requirements a state standard would include that would be additive to the substantive investor protections in Reg BI.”
- Industry views are, literally, contrary to the views of just about all others. They are contrary to the views of leading jurists in history, leaders who crafted the Advisers Act of 1940 as expressed in the Supreme Court in SEC V. Capital Gains Research. They are contrary to simple notions of logic and common sense about advice and sales and to today’s advisor leaders and fiduciary experts. At its best, the industry case is un-serious and unsubstantiated. At its worst it insults the intelligence of investors, policymakers and regulators. Think about this: After ten years battling against fiduciary duties, no independent expert can be found to speak out for the industry’s views and to refute the case of fiduciary scholars and investor advocates. Not one.
Maryland has a unique opportunity to lead the nation towards a real fiduciary standard. Thank you for this opportunity for the Institute to express its views.