The New Jersey Bureau of Securities has proposed a new fiduciary regulation that requires all registered financial services professionals in the state to be held to a higher advice standard than is currently required by FINRA’s suitability standard. Once adopted, the state will be among the first to adopt a uniform fiduciary standard.
“Today, we are strengthening the integrity of New Jersey’s financial services industry by proposing some of the strongest investor protections in the nation,” said Governor Phil Murphy. “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.”
The proposed rule, published yesterday in the New Jersey Register, requires all registered financial services professionals to act in accordance with the fiduciary duty to their customers when providing investment advice or recommending an investment strategy, opening or transfer assets to any type of account, or the purchase, sale, or exchange of any security.
Conduct falling short of this fiduciary duty would, under the proposed rule, constitute a “dishonest and unethical practice.”
Currently, broker-dealers and their agents are required to abide by a suitability standard and must have a “reasonable basis” to believe a recommended transaction or investment strategy involving securities is suitable for the customer. On the other hand, investment advisers and their representatives are held to a stricter fiduciary duty.
“The rule we’re proposing codifies a standard that most investors believe they are already receiving from their financial professionals,” said Christopher Gerold, chief of the New Jersey Bureau of Securities. “We believe we have crafted a sound, sensible rule that not only fulfills our duty to safeguard investors, but also protects the integrity of the financial markets.”
In March 2018, after surviving a number of court challenges, the Fifth Circuit Court of Appeals vacated the Department of Labor’s fiduciary rule, maintaining that the agency acted beyond its authority in crafting the rule and expanding the definition of an investment-advice fiduciary.
Several commenters to New Jersey’s pre-proposal requested that the New Jersey Bureau of Securities not proceed with its rulemaking until the SEC adopts its Regulation Best Interest, which requires all broker-dealers and agents act in the best interest of retail customers when making a recommendation of any securities transaction or investment strategy involving securities to retail customers.
The Bureau said that it has been monitoring and reviewing the SEC’s rulemaking process, including the comments submitted to the SEC, and believes that Regulation Best Interest does not provide sufficient protections for New Jersey investors.
“If the federal government won’t act to protect investors, then we will,” said Attorney General Gurbir Grewal. “Today, we are fulfilling Governor Murphy’s promise to strengthen financial protections for New Jersey residents. The rule we’re proposing will provide important safeguards for New Jersey’s families when they invest, save, and plan for their future.”
Additional highlights of the proposed rule include:
- In accordance with the common law definition of fiduciary duty, both the duty of care and duty of loyalty must be satisfied.
- For purposes of the duty of care, the broker-dealer, agent, or adviser must make reasonable inquiry, including risks, costs, and conflicts of interest related to the recommendation or investment advice, and the customer’s investment objectives, financial situation, and needs, and any other relevant information.
- When a broker-dealer or its agent makes a recommendation, the fiduciary duty obligation extends through the execution of the recommendation and shall not be deemed an ongoing obligation.
- Transaction-based fees are allowed in certain circumstances provided that the fee is reasonable and is the best of the reasonably available fee options for the customer, and the duty of care is satisfied.
- To address the concerns over dual registrants “switching hats” when dealing with the same customer, the fiduciary duty obligation shall be applicable to the entire relationship with the customer on an ongoing basis.
- Incentives, such as sales contests, that encourage and reward conflicted advice are presumptively invalid.
- There is no presumption that disclosing a conflict of interest in and of itself will satisfy the duty of loyalty.
There will be a 60-day public comment period that closes on June 14, 2019.
According to the New Jersey Consumer Affairs website, the comment forms are currently being modified. In the meantime, comments can be emailed to DCAProposal@dca.lps.state.nj.us and should include your name, affiliation and contact information (email address and telephone number).
After the Bureau of Securities reviews all comments, a summary and their response will be published in a notice of adoption expected sometime in the fall. Once published, the rule becomes final and will take effect in 90 days.