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States’ Rights Key to Financial Services Wins

By Thomas R Rosenfield, President, HillStaffer, LLC

Financial services organizations, take note: consumer protections likely will become a key component of most successful public policy initiatives in 2019 and 2020, taking precedence over capital formation and economic expansion. Look beyond Washington, D.C., as well: successful government relations (GR) efforts must include state level strategies and tactics that engage legislators intent on reasserting states’ rights in order to reign in Trump administration policies viewed as unfair and excessive.

Democrats had many gains this past November and that changed the federal landscape. Democrats now control the U.S. House of Representatives, and at the state level we witnessed Democrats notch three supermajority victories, bringing their total to 7, gain 7 governorships for a total of 23, and increase their number of ‘trifectas’ from eight to 14 (a trifecta is when one party controls both chambers and the governorship). The Republicans lost one supermajority (North Carolina), while still are holding on to 16. They also still control 27 governorships and 22 ‘trifectas.’

Historically, losses by Republicans often have meant a trend towards consumer protections and tightening of regulatory and legislative controls for those in financial services. 2019 appears no different and, given the acrimony at both the federal and state levels, expect this shift to remain throughout the current legislative session, especially given the approaching presidential election.

Consumer Protections Become the Focus – Only recently the financial industry focused public policy efforts on pro-growth issues such as expansion of capital formation and lending activity. But, the pendulum has begun to swing back. Democratic victories in the states have spurred increased efforts to challenge federal regulations promulgated by the current administration and by Republicans. Additionally, pressure to promulgate more pro-consumer rules is being exerted over federal agencies including the U.S. Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the Federal Deposit Insurance Corporation (FDIC).

Expect FINRA, the SEC and others being called to testify before Congress on fiduciary rules, arbitration, accredited investor definitions, Reg D., Reg. A, and a host of financial services issues, forcing greater attention to consumer protections rather than expanding growth. Indeed, U.S. Sen. Sherrod Brown (D-OH), Ranking Member of the Senate Banking, Housing and Urban Affairs Committee and a member of the Senate Finance Committee, recently stated: “When I look at the list of today’s bills, I see a lot of rollbacks and very little protection for ordinary investors. In fact, when I hear some people say we need these bills to facilitate capital formation, I’m not sure what problem they are trying to solve,” noting that there appeared to be abundant opportunities given that venture capital investment hit a record in 2018, while initial public offerings rose last year to their highest level since 2014.

Reasserting States’ Rights – Successful government relations strategy can no longer focus solely, or even primarily, on federal activity. The states are putting federal officials in Washington on notice that they are not going to idly stand by and watch consumers be harmed. This paradigm shift by policymakers requires organizations to adjust their GR strategy and tactics in order to achieve desired impacts.

In pushing fiduciary reform in New Jersey, Governor Phil Murphy (D-NJ) recently stated, “At a time when President Trump is systematically dismantling the consumer protections implemented in the wake of the 2008 economic crash, we are building stronger safeguards for our consumers.” Added a regulator in that state: “Today we are taking an important step….to protect….consumers, who find themselves increasingly exposed by the federal government’s regulatory retreat.”

Multiple ‘federal’ issues are now taking center stage in the states. For instance, the fiduciary rule until recently remained a federal policy initiative by the U.S. Department of Labor and subsequently by the SEC. The landscape changed when the Nevada state legislature passed a fiduciary rule, essentially imposing a new standard on broker-dealers, sales representatives and investment advisors (see, NRS 90.575, NRS 628A.010, and NRS 628A.020, as modified by SB 383). Regulators in Nevada currently are writing regulations to be added to these statutes.

Governor Murphy announced his intention to propose a fiduciary duty rule for investment professionals in New Jersey through the regulatory – not legislative – process. The Maryland Senate recently introduced the Financial Consumer Protection Act of 2019 (SB 786), which places additional requirements on insurance agents and brokers. Similar efforts passed in New York last year, too.

“[W]e greatly appreciate states such as Nevada that are willing to step in to fill the regulatory void by providing the protections investors need and expect,” noted one advocate for increased state intervention.

The fiduciary rule is not the only financial issue gaining traction in the states. The Oregon legislature just passed the country’s first state-wide rent control bill. “Landlords have had their run of the playground, and we’re taking it back,” said New York Assemblywoman Linda Rosenthal, a Democrat.

Relevant Strategies and Tactics – In short, elections have consequences and financial services advocates must update their strategic thinking and implement tactics that will keep their organizations and members relevant. It is possible to be both pro-consumer and pro-growth. Recognize that the battlefront is in the states as well as in Washington, D.C. Change your talking points to recognize and embrace consumer protections along with reasonable policies that still promote growth and competition.