Navigating the Regulatory Patchwork: Lessons for Financial Advisers
By Lisa Gok, chief legal officer, Cetera Financial Group
As federal oversight shifts, financial firms should consider embracing the most stringent state regulations to build trust, minimize risk, and stay ahead of future changes.
The landscape of financial regulation is ever-evolving, and with the recent shift in federal administration, businesses are rightly paying close attention to the potential implications for compliance. Although it has long been our position to advocate for uniform regulation which we believe is best for all concerned, given the current state of affairs at the federal level, it is clear that we may be faced with a variety of differing state standards that firms will need to navigate. In this period of change, a strategic focus on adhering to the highest state regulatory standards should be considered. Even firms that don’t operate within certain states should carefully consider adopting these elevated standards as a proactive measure to safeguard their operations and reputation. Let’s explore why this approach is vital and how financial advisers, registered investment advisers, and broker-dealers can position themselves for success.
The Challenges of a Patchwork Regulatory Framework
One of the most significant concerns when regulatory oversight shifts from federal to state control is the lack of uniformity among individual states. For firms operating across jurisdictions, this creates a logistical and compliance nightmare if they are not already operating at the higher level of regulation. Each state may impose distinct rules, making it difficult for firms to implement consistent standards. The complexity is compounded for firms providing multiple services, such as brokerage and advisory, and for advisers serving clients in multiple states.
The practical response for many firms is to adopt a “lowest common denominator” approach, where they comply only with the least stringent regulations. However, this strategy can limit investor choice and access to both products and services, ultimately undermining client trust and satisfaction. To navigate this fragmented landscape, financial firms must focus on uniformity where possible and set a high bar for compliance, regardless of jurisdictional disparities.
Learning from the Most Stringent Standards
States such as Massachusetts have long been recognized for their rigorous regulatory frameworks. While challenging to implement, these standards often prioritize investor protection and can serve as a model for other states. For example, Massachusetts’ strict oversight of recommendations involving illiquid or complex investment products has set a high benchmark. Advisers and firms would do well to follow these precedents to ensure they remain compliant and competitive.
Some states have also promoted model rules for adviser conduct that prioritize transparency and client interests. While these measures can be challenging for firms to implement, their adoption promotes greater uniformity and clarity. Financial professionals who proactively align with these high standards will be better positioned to adapt to evolving regulatory landscapes.
Building Competitive Advantage Through Compliance
Adopting the highest state standards is more than just a defensive strategy; it’s an opportunity to differentiate in a crowded marketplace. Many states are implementing the “best interest” standard outlined in Regulation Best Interest (Reg BI), which applies to broker-dealers. This standard provides clear guidance for regulators, advisers and clients alike, fostering greater confidence in the financial system.
For investment advisers, the fiduciary duty remains the gold standard. It requires advisers to put their clients’ interests ahead of their own, creating a foundation of trust that is invaluable in client relationships. By consistently exceeding compliance requirements, firms and advisers can demonstrate their commitment to excellence, earning the loyalty of clients and positioning themselves as trusted partners.
Preparing for Long-Term Regulatory Shifts
Nothing stays the same. The regulatory pendulum will continue to swing with each change in political leadership, and firms must prepare for future shifts in federal and state dynamics. The statute of limitations for federal securities laws is five years, meaning enforcement actions can still arise long after a regulatory pause. And even during periods of reduced federal oversight, individual states often step up their enforcement activities.
A prudent long-term strategy involves adopting the highest level of existing standards at the state level and closely monitoring regulatory developments. This proactive approach not only minimizes risk but also ensures firms are well-prepared for any future changes, whether driven by state or federal authorities.
Practical Steps for Compliance Excellence
Financial advisers and broker-dealers looking to align with the most demanding state regulations can take several practical steps:
- Stay Informed: Regularly review both current and proposed regulations. Engage with industry associations and regulatory bodies to stay ahead of changes.
- Collaborate Across Teams: Involve advisers, compliance officers, and business leaders in regulatory discussions from the outset. A unified approach ensures comprehensive compliance.
- Invest in Training: Equip your team with the knowledge and tools needed to navigate complex regulations effectively. Regular training sessions can help keep everyone informed and aligned.
- Leverage Technology: Use compliance technology to track regulatory changes, manage documentation, and streamline reporting processes.
- Engage Legal Expertise: Consult with legal professionals who specialize in state and federal regulations to ensure your practices are airtight.
Maintaining Agility in a Dynamic Environment
In an industry defined by rapid change, flexibility is key. Businesses must remain agile while committing to high compliance standards. This involves cultivating a culture of adaptability and openness, where teams are encouraged to find creative solutions to regulatory challenges. Regularly revisiting policies and procedures ensures they remain relevant and effective as the regulatory environment evolves.
While the prospect of navigating disparate state regulations may seem daunting, it also presents an opportunity to lead by example. By holding themselves to the highest state standards, financial firms can build trust, enhance client relationships, and position themselves for long-term success. In our shifting regulatory landscape, vigilance, preparation, and a commitment to excellence will serve as the cornerstones of a resilient compliance strategy. Financial professionals who embrace these principles will not only mitigate risk but also elevate their role as trusted stewards of their clients’ financial well-being.
Lisa Gok is the chief legal officer at Cetera Financial Group, where she serves as executive legal adviser to Cetera and its board of directors. In this role, Gok is responsible for ensuring a holistic legal view for Cetera, ensuring best practices while operating as a strong strategic partner for Cetera on a broad range of legal, operational, and corporate activities. Prior to joining Cetera in 2012, Gok held a variety of leadership positions both in and outside of financial services, including 15 years with the U.S. Securities and Exchange Commission.
The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of AltsWire.
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