Broker/dealers and their reps doing business in New Jersey should be required to operate under a higher standard that currently applies to investment advisors, according to a new proposed rule released yesterday by the state's Bureau of Securities. The rule would require all financial advisors registered in the state to act as fiduciaries, making New Jersey one of the first states to propose a uniform fiduciary standard for all financial services professionals.
Gov. Phil Murphy touted the proposed rule, which he called “some of the strongest investor protections in the nation.”
“At a time when the federal government is undermining the consumer protections implemented in the wake of the 2008 economic crash, we are committed to ensuring our residents and families are protected from predatory financial practices,” he said.
The rule would apply to recommendations on investments; opening or transferring assets into any kind of account; and the purchase, sale or exchange of any security. A broker or advisor has to make “reasonable inquiry” in the best interest of their client, and any recommendations offered cannot be made with regard to a financial interest of the broker, advisor or any other third party.
While Securities and Exchange Commission–registered investment advisors already adhere to a fiduciary standard, brokers currently must provide advice that is “suitable” for clients. Additionally, many b/d advisors also operate as investment advisors and often will “switch hats” when dealing with the same client, obfuscating what standard the advisor must adhere to during an interaction, according to the Bureau of Securities. Under the new standard, brokers would have to adhere to a fiduciary duty for all their interactions with a client, whether they are operating as a broker or investment advisor.
“The rule we’re proposing codifies a standard that most investors believe they are already receiving from their financial professionals,” New Jersey Bureau of Securities Chief Christopher Gerold said.
The SEC has said it intends to release a final rule on its Regulation Best Interest this fall, though last month SEC Chairman Jay Clayton refused to offer a detailed time line. This regulation is expected to require more robust disclosure procedures to ensure that brokers are acting in the “best interest” of a client, though critics contend this would fall short of the fiduciary duty demanded of investment advisors; New Jersey’s rule stressed that disclosing conflicts alone would not suffice in protecting investors.
“As several commenters to the pre-proposal noted, the proposed SEC standard is greater than that of the suitability rule but is less than that of a fiduciary duty,” a summary offered with the rule said. “The Bureau believes that the SEC Regulation Best Interest does not provide sufficient protections for New Jersey investors.”
The New Jersey rule also follows a court ruling last year that vacated the U.S. Department of Labor's proposed fiduciary rule, arguing the DOL had overstepped its regulatory bounds. Critics of the New Jersey regulation argued that states should refrain from instituting their own standards before the SEC comes out with its rule.
“State-specific standards will lead to a patchwork of varying requirements across the country, confusing investors and creating uncertainty for advisors who are trying to best serve their clients while also obeying state and federal regulations,” said David Bellaire, executive vice president and general counsel of the Financial Services Institute.
New Jersey's rule would create an exemption for brokers or advisors acting in a fiduciary capacity to an employee benefit plan or its participants, unlike Nevada’s recent proposal. In Connecticut, financial planners must disclose that they do not have a fiduciary duty if it is requested, while some New York legislators are mulling an act that would mandate that brokers disclose that they have no fiduciary duty to their clients. Maryland legislators introduced a fiduciary standard bill in February, but it was rejected in the state Senate Finance Committee earlier this month.
Knut Rostad, the co-founder and president of the Institute for the Fiduciary Standard, said it would be important for states to follow in New Jersey's footsteps.
“Passing the New Jersey rule as proposed would be an inspiration to other states,” he said.
A public comment period will last until June 14; afterwards, the Bureau of Securities will review comments and release a summary of comments and responses this fall. The rule becomes final after the summary’s publication and will take effect 90 days later.
Rostad said the next step for supporters of fiduciary standards on the state level is to consider how their advocacy can be successful in contrast to their previous calls for robust federal oversight.
“A balanced view of what’s happened over the past 10 years is fiduciary duties have been solidly defeated at the federal level,” he said. “What should we and could we do differently to avoid repeating history at the state level, and specifically in New Jersey?”