New Jersey state lawmakers introduced legislation this week that would require financial advisers to disclose their fiduciary status to investors.
Under the measure, advisers who do not have to meet a fiduciary standard must tell clients in a compulsory statement.
"I am not a fiduciary," reads the language included in the bill. "Therefore, I am not required to act in your best interests, and am allowed to recommend investments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks and expected returns for you."
The legislation's sponsors — Sen. Patrick J. Diegnan Jr., D-Middlesex; Assemblywoman Nancy J. Pinkin, D-Middlesex; and Assemblyman Nicholas Chiaravalloti, D-Hudson — refiled the bill Tuesday, after it failed to become a state law in the previous session of the legislature.
The idea for the measure grew out of a meeting Mr. Diegnan had with members of the New Jersey Financial Planning Association in 2015, according to his chief of staff, Tom Lynch.
"Consumers just don't understand the concept of a fiduciary, but they do understand doing the right thing," Mr. Lynch said. "This bill seeks to strike that balance."
It's not clear whether the measure will get farther in the legislative process this year. The lawmakers have not yet begun to try to build political support, nor have they talked to New Jersey Gov.-elect Phil Murphy, a Democrat and former Goldman Sachs official, about the bill.
Investment advisers are held to a fiduciary duty, while brokers must meet a suitability standard, which requires that they sell products that meet an investor's objectives and risk tolerance but allows them to recommend high-fee investments.
Although the three-page bill has few regulatory directives, the bracing disclosure script could be seen by brokers as a shaming mechanism, according to Andrew Hartnett, an officer at Greensfelder, Hemker & Gale.
"At first glance, it seems like the least heavy-handed of any fiduciary regulations," said Mr. Hartnett, a former Missouri securities director. "But the disclosure is written in such a way that I wonder what the future of the commission-based investment adviser model in New Jersey is if this becomes law."
Connecticut recently implemented a fiduciary disclosure law, and last year the Nevada legislature approved a bill that applies fiduciary duty to the state's brokers. The regulation to implement the law is now being drafted.
A similar bill to New Jersey's has been introduced in the New York legislature. Meanwhile, the New York Department of Financial Services has proposed a regulation requiring that insurance sales professionals act in the best interests of their clients.
All of the state activity is occurring while the Department of Labor reviews its fiduciary duty rule under a directive from President Donald J. Trump that could lead to major changes. The Securities and Exchange Commission also is working on its own fiduciary rule.
The swirl of activity is causing stress for financial firms, according to George Michael Gerstein, counsel at Stradley Ronon Stevens & Young.
"What will frustrate the industry is the timing of these" state bills, Mr. Gerstein said. "It's probably a challenge for compliance when you're tracking what happens at the DOL, the SEC and at the state level. It becomes difficult to map."
The existing and potential state laws could be legally preempted by the DOL and SEC rules. But even if they aren't, federal regulators can provide an overarching investment advice rule that prevents a proliferation of state regulations.
"It certainly heightens the benefits of the SEC putting forward a meaningful proposal sooner rather than later in terms of uniformity and ease of administration," Mr. Hartnett said.
Mr. Gerstein expects momentum for fiduciary laws at the state level to keep building now that New York, New Jersey and Nevada are leading the way. In addition, there is concern by some state lawmakers about the DOL rule being weakened.
"It is easy to score political points with these types of bills and laws," Mr. Gerstein said. "The industry is going to need some clarity and finality sooner rather than later at this rate."