New Jersey is the second state after Nevada to propose a uniform fiduciary standard for broker-dealers and investment advisers. Although pre-proposal commenters advised the New Jersey Securities Bureau to wait on the rulemaking until the SEC adopts its Regulation Best Interest (RBI), the Bureau has decided to go ahead with the proposal because RBI’s proposed standard, while higher than the current broker-dealer suitability standard, is not as high as a fiduciary standard for protecting investors. Moreover, said the Bureau, RBI’s mandating broker-dealers to disclose in writing the conflicts of interests from recommending investments to their customers that might benefit the broker-dealers over the customers will not necessarily prevent the customers from incorrectly investing in the broker-dealer-benefitting recommendations.
But the Bureau has promulgated the proposal in response to advice from a Dodd-Frank Act Section 913 study recommending the SEC to create a uniform fiduciary duty standard for investment advisers and broker-dealers—when they provide advice to retail customers—that is consistent with the standard currently applied to investment advisers. But one of the primary reasons for the Bureau’s moving ahead with the proposal is because the Section 913 study revealed that investors are confused about the different roles their broker-dealers and investment advisers play as financial professionals, to the point of mistakenly believing that broker-dealers currently have a fiduciary duty to protect their customers’ investment interests.
Rulemaking highlights. As the states have historically been considered the “local cops on the beat” by virtue of being in the best position to protect their respective resident investors, New Jersey (after Nevada) has proposed a new rule, as well as amendments to an existing rule, to eradicate the investors’ confusion over the differing roles, by creating a uniform fiduciary standard for both broker-dealers and investment advisers that will take effect 90 days from the effect date of the new rule. Highlights of the proposed rulemaking include the following:
- Making it a dishonest, unethical business practice for broker-dealers or their agents to fail to act as a fiduciary with a duty owed to the customer when providing a customer with investment advice or a recommended investment strategy, opening of, or transfer of assets to, any type of account, or a security purchase, sale, or exchange. The fiduciary standard does not apply to a “customer” that is a bank, savings and loan association, insurance or registered investment company, a broker-dealer registered with a state securities commission (or agency or office performing like functions), an Advisers Act-registered investment adviser or investment adviser registered with a state securities commission (or agency or office performing like functions), or any person (whether a natural person, corporation, partnership or trust) having at least $50 million total assets;
- Mandating broker-dealers, agents, investment advisers and investment adviser representatives to satisfy both a duty of care and a duty of loyalty to meet the fiduciary duty requirement; the duty of loyalty requires making recommendations or providing investment advice to a customer that is free of a broker-dealer’s, agent’s, investment adviser’s, investment adviser representative’s, affiliated or related party’s, employee’s or contractor’s financial or other interests;
- Presuming a breach of the duty of loyalty when direct or indirect compensation is offered or received to or from a broker-dealer, the broker-dealer’s agents, an investment adviser or the investment adviser’s representatives, for recommending the opening of, or asset transfer to a specific account type, or for purchasing, selling or exchanging specific securities that are not the best of reasonably available options;
- Requiring broker-dealers, agents, investment advisers and investment adviser representatives to reasonably inquire about the risks, costs and conflict of interests pertaining to a recommendation or piece of investment advice;
- Disclosing a conflict of interest does not, by itself, presume that the duty of loyalty is met;
- Breaching the fiduciary duty owed to a customer does not occur when the customer’s broker-dealer or agent receives a transaction-based fee, if the fee is reasonable and is the best of the reasonably available fee options;
- Nothing in the new fiduciary duty rule applies to a person who acts as a fiduciary to an employee benefit plan, its participants or beneficiaries (because those terms are defined in the Employee Retirement Income Security Act (ERISA)); and
- Nothing in the new fiduciary duty rule creates a broker-dealer capital, custody, margin, financial responsibility, financial reporting, recordkeeping, or bonding requirement that differs from, or is in addition to, SEC requirements;
The reference number for the proposal is PRN 2019-044.