Fate of New Jersey fiduciary standard could come down to politics, court

With strong support of governor, proposal has momentum out of gate

Apr 16, 2019 @ 4:30 pm

By Mark Schoeff Jr.

A New Jersey proposal to raise investment advice standards is benefitting from strong political momentum at the outset, which may protect it from financial industry opposition.

On Monday, the state's Securities Bureau released a proposal for a uniform fiduciary standard for the state's financial professionals, which would strengthen advice rules for brokers, who currently meet a suitability standard.

The financial industry has opposed state-level work on advice standards, such as a Nevada fiduciary rule proposal and fiduciary legislation in Maryland. It's also gearing up to battle the New Jersey rule.

"State-specific standards will lead to a patchwork of varying requirements across the country, confusing investors and creating uncertainty for advisers who are trying to best serve their clients while also obeying state and federal regulations," said David Bellaire, executive vice president and general counsel at the Financial Services Institute.

Financial firms and industry groups want the field to remain clear for the Securities and Exchange Commission's advice reform proposal, which revolves around the so-called Regulation Best Interest to raise the broker standard. A final SEC rule is expected this summer.

"We maintain the view that it would be better for the [New Jersey Securities] Bureau to wait until the SEC has finalized Regulation Best Interest so that the Bureau can consider the necessity of additional regulations at the state level," an LPL Financial spokesperson said in a statement.

The financial industry succeeded in stopping the Maryland bill earlier this month. But it will be harder to stymie the New Jersey rule, which is being championed by Gov. Phil Murphy, a former executive at Goldman Sachs.

"Today, we are strengthening the integrity of New Jersey's financial services industry by proposing some of the strongest investor protections in the nation," Mr. Murphy, a Democrat, said in a statement on Monday.

The fact that the New Jersey effort is coming from the state's regulators rather than the legislature gives it momentum, according to Barbara Roper, director of investor protection at the Consumer Federation of America.

"The impetus for this started in the governor's office," said Ms. Roper, who asserts the New Jersey proposal is stronger than the SEC's. "I don't think it's vulnerable to a legislative challenge. They went into it with their eyes wide open, so I don't see any reason for them to back down."

More states are likely to propose advice rules, according to Rhian Horgan, founder and chief executive of Kindur, a digital retirement finance platform.

"This is the first of many rather than an anomaly," Ms. Horgan said. "I generally don't love state-by-state [regulation], but I think in this particular case, there's less risk for conflicting standards because of a [wide] understanding of what fiduciary obligations entail."

That sentiment is not likely to be found in many industry comment letters, which are due by June 14.

"It's going to lead to confusion at the investor and firm level," said Dan Bernstein, chief regulatory counsel at MarketCounsel, an Englewood, N.J., compliance consultant. "The firms will have to follow 50 different sets of standards depending in which state their clients reside."

George Michael Gerstein, counsel at Stradley Ronon Stevens & Young, foresees lawsuits against the state-level rules based on claims that the states exceeded their authority and are pre-empted by the SEC.

"They will be tested in court," Mr. Gerstein said.

That's a bar the New Jersey rule should clear, according to Ms. Roper.

"They have a strong case to go into court with, if they face an industry challenge," she said.


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