The state-level rule-making, primarily in states led by Democrats, comes as the Securities and Exchange Commission moves to finish its own national conduct requirements for brokers paid by commission for investment advice. At issue are concerns about conflicts of interest, such as pay incentives that favor some investment products over others.
State regulators and Democratic lawmakers have criticized the SEC’s effort, saying the commission should require brokers to meet the same standard as investment advisers: that all decisions be made with “undivided loyalty” toward the investor.
New Jersey earlier this week took a step toward its own standards on brokerages and sales representatives, proposing a rule that would require brokers to make investment advice without considering their own financial interests. The proposal is similar to one put forward by Nevada regulators late last year, and one floated, but delayed, by Maryland legislators earlier this month. New York and Connecticut are also implementing versions of a fiduciary standard for some types of retirement plans and investment products.
“In an ideal world, we’d have one federal standard,” New Jersey Attorney General Gurbir Grewal said. “But the SEC has not stepped up.”
An SEC spokeswoman declined to comment. In December Senate testimony, SEC Chairman Jay Clayton said the commission’s proposal drew on fiduciary principles while recognizing the different relationships brokers and investment advisers have with their customers.
The SEC is expected to release a final rule this summer and is likely to stop short of placing a formal fiduciary responsibility for brokers. It would allow leeway for certain types of pay incentives as long as they are disclosed to a customer, while banning others, such as high-pressure sales contests.
Some Democratic state officials criticized that discrepancy and vowed to set their own standards if the SEC’s final rule wasn’t altered significantly.
“If the Commission does not adopt a strong and uniform fiduciary standard, Massachusetts will be forced to adopt its own fiduciary standard to protect our citizens from conflicted advice by broker-dealers,” Massachusetts Secretary of the Commonwealth William F. Galvin wrote to the SEC in August.
Brokers have been generally supportive of the SEC’s efforts and view the state rule-making as a potentially costly headache that could force them to limit product offerings in certain states or even pull out of them altogether. Morgan Stanley, for instance, said it could stop offering brokerages services in Nevada unless the state’s rule is changed. Wells Fargo & Co., Edward Jones, Charles Schwab Corp. and others said they would pare down the investment products available to customers there.
“It’s hard to argue with the fact that multiple inconsistent, duplicative and conflicting standards will increase costs and make the system less efficient,” said John Taft, vice chairman of Baird, a wealth-management firm.
For some state officials, moving individual investors away from the brokerage-commission model to a fee-based advisory system isn’t an accident—it is the point of a fiduciary rule. Democratic Maryland State Sen. Jim Rosapepe, who sponsored legislation that includes a fiduciary standard, said it would absolutely push customers toward using a registered investment adviser, which he said was a more efficient way to invest.
“The fiduciary standard is going to win at some point, it’s just a question of when,” he said.
The Maryland plan failed in a state Senate committee earlier this month. Mr. Rosapepe plans to reintroduce the measure in the next legislative session.
Brokers have said they may sue to block the standards from going into effect, arguing that federal rules trump state regulations. The state regulations, for instance, would require brokers to maintain books and records beyond their federal obligations, in violation of the 1996 National Securities Markets Improvement Act, opponents of state rules contend.
State lawmakers in Nevada and New Jersey drafted the measures with those laws in mind, anticipating likely challenges from industry, proponents say. Backers of a fiduciary standard have suffered setbacks in court before, most prominently when a federal appeals court threw out the Obama administration’s retirement-advice rule in last June.
“We try to pre-empt the pre-emption arguments,” Mr. Grewal said.