New Jersey brokers expect industry will push back against fiduciary rule proposal

Brokerage executives predict the industry to put up a fight against the rule, which they say will lead to a complex web of compliance

Sep 27, 2018 @ 5:13 pm

By Greg Iacurci

New Jersey brokerage executives expressed consternation over adding another layer of regulation by requiring them to adhere to a fiduciary standard, predicting officials will face stiff headwinds in getting it across the finish line.

"The state of New Jersey is taking on a tall order in trying to do this," said Michael Karalewich, CEO of Nationwide Planning Associates Inc., an independent broker-dealer based in Paramus, N.J.

"Their heart is in the right place," Mr. Karalewich added. "But there's definitely going to be pushback from the industry. We watched what happened with the DOL [fiduciary rule]. I would expect we'd see some of that here for firms operating in New Jersey."

New Jersey governor Phil Murphy announced Sept. 17 that the state's Bureau of Securities would be issuing a proposal to set a fiduciary standard governing investment advice provided by broker-dealers and their representatives.

The proposal is in response to the death of the Department of Labor's fiduciary rule, which was overturned in court, and the Securities and Exchange Commission's own investment-advice proposal, which isn't yet final but which the governor feels will "fall short."

"They have the [legal] right to do it, I think, but I don't know if it's a smart thing to do," said Damon Testaverde, chairman of Network 1 Financial Securities Inc., a hybrid practice based in Red Bank, N.J. "We need to have efficient capital markets."

"We just have to be careful of what we propose and how we propose it," Mr. Testaverde said.

While specific details of the proposal are still hazy, the governor has said the rule would create a uniform fiduciary standard for brokers and registered investment advisers.

Executives said an additional tier of rules from another entity — the state — would be tough. And New Jersey may be just the tip of the iceberg; experts believe other states could follow suit.

Only six other states have more brokerage firms than New Jersey, which has 472, according to the Financial Industry Regulatory Authority Inc.

"You have costs at the SEC level with regulation, at the Finra level, at the state level. And if there's no consistency, that's where it becomes challenging for advisers, broker-dealers, clients and attorneys," said Thomas Hyland, president of TFS Securities Inc., based in Middletown, N.J.

"Having to answer to three masters and duplicate efforts in improving compliance becomes very challenging," Mr. Hyland said. "If the lines of regulation are drawn as straight, dark, black lines, it would be easy."

Mr. Hyland, whose firm has about 200 advisers and $4 billion in assets, said he is in favor of a fiduciary standard, but that he would prefer a single level of oversight to simplify compliance and supervision. More regulation in the state, he said, may cause smaller firms and advisers to "reconsider their position in the business" and whether "they have the resources, time and money to comply."

"It doesn't mean I have to leave New Jersey, but I won't be calling customers in New Jersey," said Mr. Testaverde of Network 1 Financial Securities. "I'll be calling customers in other states."

Mr. Karalewich of Nationwide Planning Associates, which has around 125 registered representatives and $2.5 billion in assets under management, said the brokerage industry would prefer the SEC to take the lead on governing investment advice.

At the same time, Mr. Karalewich acknowledged that he'd be supportive of New Jersey's regulatory change because it "is what's ultimately best for the investing public."

Further, preparing to comply with the DOL fiduciary rule, which raised investment advice standards in retirement accounts before getting quashed earlier this year, could potentially make compliance with a state fiduciary rule easier, he said.

"It'd be hard not to get behind the concept," Mr. Karalewich said. "It's not going to cause me to change the way that we operate. If the rule is something we have to abide by, then we'll embrace it.


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