On February 4, 2019, the Financial Consumer Protection Act of 2019 was introduced in the Maryland Senate as bill MD SB 786. An analog bill for the same proposed legislation has been introduced before the Maryland House as MD HB 1127. Included in the proposed legislation is a section that would make broker-dealers, broker-dealer agents, and insurance producers fiduciaries.
Specifically, the proposed legislation would amend Maryland’s Corporations and Associations Article to create a fiduciary duty for any individual covered by the statute “to act in the best interests of the customer without regard to the financial or other interest of the person or firm providing the advice.” The legislation also vests broad powers in the hands of the Commissioner of Financial Regulation by authorizing the Commissioner to “adopt regulations to carry out the fiduciary duty required under this section,” including regulations that (1) define, require, prohibit, or exclude an act, practice, or course of business of a person subject to the statute; and (2) prevent a person from engaging in acts, practices, and courses of business in violation of the statute.
The proposed legislation comes on the heels of a report the Maryland Financial Consumer Protection Commission (the “Commission”) issued in January 2019, recommending changes to Maryland law. In that report, the Commission recommended that the “ General Assembly pass legislation that provides that broker-dealers, broker-dealer agents, insurance producers, investment advisers, or investment adviser representatives who offer advisory services or hold themselves out as advisors, consultants, or as providing advice, would be held to a fiduciary duty to act in the best interest of the customer without regard to the financial or other interest of the person or firm providing the advice.” The Commission also suggested that, “[i]n addition to broadening the fiduciary duty standard in Maryland to broker-dealers and insurance agents, the fiduciary duty standard currently imposed on investment advisers in Maryland needs to be strengthened, as it is currently weaker than the national fiduciary duty standard.”
The legislation proposed in Maryland’s General Assembly is sweeping in scope and, if passed in its current form, would have a profound impact on the financial services and insurance industries in the state. Among other things, the proposed legislation is very broad as applied to insurance producers, making them fiduciaries in the context of a wide range of transactions. Given its scope, the proposed legislation is likely to meet fierce opposition from industry groups and other organizations who are concerned about the detrimental impact the proposed legislation could have on the cost and availability of insurance and other investment products in the marketplace for Maryland consumers.
It is difficult to predict if the proposed legislation will succeed. Just last year, Maryland’s General Assembly declined to pass similar a provision that would have made broker-dealers and insurance producers fiduciaries. The current proposed legislation, however, comes against a different backdrop. After declining to pass the legislation proposed in 2018, the General Assembly directed the Commission to study the outcome of federal efforts on fiduciary duty and determine whether Maryland should enact its own fiduciary law. The Commission has completed that work and determined, among other things, that because “[the] SEC and the state insurance regulators have proposed standards that largely preserve the status quo, individual states may need to provide greater protections that investors expect from financial professionals who provide investment advice.” Additionally, other states, such as New York, New Jersey, and Nevada are pressing forward with their own approach to implementing a fiduciary duty standard through legislation or regulation.
We continue to view state level activity through the same lens as we have through the past year, which is that most states will likely wait to see the SEC’s final Regulation Best Interest and the National Association of Insurance Commissioner’s revisions to it Suitability in Annuity Transactions Model Regulation before determining whether they should take any action on their own. But as demonstrated by the regulations adopted by New York’s Department of Financial Services in 2018, and the recent activity in Maryland and New Jersey, states that have historically been aggressive in addressing consumer protection may be less apt to wait for a national standard.