New Jersey’s Bureau of Securities followed through on stated intentions to create a uniform fiduciary standard for broker-dealers and investment advisors with the introduction this week of a proposed rule that imposes fiduciary duties on broker-dealers and agents for certain types of recommendations and advice provided to retail customers.
New Jersey Attorney General Gurbir S. Grewal and the Bureau of Securities within the Division of Consumer Affairs says the new rule is intended to strengthen investor protections in the state by requiring all investment professionals registered with the Bureau to place their customers’ interests above their own when recommending securities or providing investment advice.
The proposed rule, published April 15 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 to a customer an investment strategy, the opening of or transfer of 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.”
The New Jersey proposal comes nearly three months after Nevada proposed a similar fiduciary regulation. New Jersey would be among the first states to adopt a uniform fiduciary standard, one of the many financial reforms widely sought by consumer advocates and many members of the financial industry after the 2008 financial crisis.
“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.”
As George Michael Gerstein, Fiduciary Governance Group Co-Chair in law firm Stradley Ronon’s Washington D.C. office, states in his April 16 analysis of the proposed rule, the Bureau opted not to wait for the release of the Securities and Exchange Commission’s final Regulation Best Interest (Reg BI) because it did not think proposed Reg BI provides “sufficient protections for New Jersey investors.” The Bureau made clear that the proposal is a higher standard than proposed Reg BI.
“If the federal government won’t act to protect investors, then we will,” Grewal said in an April 15 statement announcing the proposed rule. “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.”
“Investors should be able to trust that they are not receiving conflicted advice when investing their hard earned savings,” said Paul R. Rodríguez, Acting Director of the Division of Consumer Affairs. “We are ensuring that all registered financial professionals put their clients’ interest first by requiring that they owe the same duties of care and loyalty to their customers, regardless of the title they choose to use. Nothing short of that provides investors with the protections they deserve.”
Conditions of the rule
The proposed rule sets forth the following conditions:
- It is a dishonest or unethical business practice for an adviser, broker-dealer, or its agent, to fail to act in accordance with a fiduciary duty to a customer when making a recommendation or providing investment advice. The proposed rule applies to recommendations of an investment strategy, the opening of or transfer of assets to any type of account, or the purchase, sale, or exchange of any security.
- 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.
- The recommendation or the advice provided to the customer must be made without regard to the financial or any other interest of the broker-dealer, agent, adviser, any affiliated or related entity, and its officers, directors, agents, employees or contractors, or any other third-party.
- 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 and the resulting investor confusion, the fiduciary duty obligation shall be applicable to the entire relationship with the customer on an ongoing basis.
- Harmful 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.
“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.”
There will be a 60-day public comment period during which stakeholders have an opportunity to submit written comment on the proposed rule.
After the close of the public comment period on June 14, 2019, the Bureau of Securities will review all comments. A summary of the public comments and the Bureau’s response to them will be published in a Notice of Adoption expected sometime in the fall. Upon publication of the Notice of Adoption, the rule becomes final and will take effect in 90 days.
The proposed rule and information on how to submit a comment by June 14 can be viewed on the Division’s website at https://www.njconsumeraffairs.gov/Proposals/Pages/bos-04152019-proposal.aspx.