New Jersey releases uniform fiduciary standard pre-proposal, seeks comments

Document suggests the proposed SEC advice rule is too weak

Oct 15, 2018 @ 2:14 pm

By Mark Schoeff Jr.

New Jersey released a request for public comment Monday on what could become a proposal to raise investment advice requirements for brokers.

The state's Bureau of Securities issued what it called a notice of pre-proposal that would subject brokers, agents, investment advisers and investment adviser representatives to a fiduciary duty when providing investment recommendations to clients.

The document notes that investment advisers already adhere to a fiduciary standard. A potential rule would impose the same requirement on brokers, who currently meet a suitability standard — a bar New Jersey implied is too low.

"The bureau believes that this uniform standard protects investors against the abuses that can result when financial professionals place their own interests above those of their customers," the document states.

New Jersey is acting because federal regulators have not done enough to raise advice standards, according to the document.

It mentions that the Labor Department's fiduciary rule for retirement accounts was struck down by a federal appeals court. It suggests the Securities and Exchange Commission's advice reform proposal, which requires brokers to act in the best interests of their clients, is too weak.

"In light of these federal developments, investors remain without adequate protection from broker-dealers, who, under the suitability standard, are permitted to consider their own interests ahead of their client's interest when making investment recommendations," the document states.

The pre-proposal, which only runs for nine paragraphs, does not provide details of what a New Jersey uniform fiduciary standard would contain. But by putting out the request for comment, the state has vaulted into a leadership position on investment advice reform.

The pre-proposal argues that a uniform fiduciary standard will "reduce investor confusion and harmonize regulatory enforcement." It also states that a "regulatory gap" exists that leaves investors "often unaware of whether and to what extent those they trust to make financial recommendations are receiving undisclosed financial benefits in exchange for steering their clients to certain products."

New Jersey regulators may have used that language to get the SEC's attention.

"This could be a way to send a signal to the SEC in terms of what they'd like in a final rule from them," said George Michael Gerstein, counsel at Stradley Ronon Stevens & Young. "There is no indication at this point that a proposal will ultimately be made."

The comment period on the New Jersey pre-proposal ends Dec. 14. The state also will hold two conferences to "gather facts to inform a rulemaking." Those sessions will be held in Newark on Nov. 2 and Nov. 19.

The state is certain to hear from the American Retirement Association that its fiduciary rule would be superseded by federal retirement law: the Employee Retirement Income Security Act, which sets investment advice requirements for 401(k) plans.

"There already is a fiduciary standard," said Brian Graff, chief executive of the American Retirement Association. "We don't need a different standard in New Jersey or any other state."

Nevada enacted a fiduciary duty law in 2017, but has not yet promulgated regulations to implement it. Mr. Gerstein said most states are in a wait-and-see mode on a final SEC rule.

"I don't have the sense that most states are going to go down the path of introducing their own uniform fiduciary rule," he said.


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