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Regulation and Compliance > State Regulation

NJ Fiduciary Plan 'Far Exceeds' Other Rules: Lawyers

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New Jersey’s newly proposed uniform fiduciary plan “far exceeds” the Securities and Exchange Commission’s Regulation Best Interest as well as the Labor Department’s now defunct fiduciary rule, according to a recent analysis by Groom Law Group.

“New Jersey believes that a uniform standard of care is necessary for the provision of securities recommendations — and that such standard must be a fiduciary one,” the attorneys write in their Groom Benefits Brief.

The “Fiduciary Duty of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives” proposal:

  • includes an expansive definition of what constitutes a “recommendation”;
  • imposes a uniform fiduciary duty on brokers and advisors; and
  • creates presumptive breaches if brokers and advisors do not recommend the best reasonably available option and fee arrangement.

Unlike Maryland, whose fiduciary legislation was torpedoed by the state’s Senate Finance Committee on April 4, New Jersey “doesn’t need votes, per se, just to follow their administrative law in promulgating a regulation and hoping it stands up in court,” George Michael Gerstein, co-chair of Stradley Ronon’s fiduciary governance group, told ThinkAdvisor in a recent interview.

The New Jersey Bureau of Securities followed through on its plan to create a uniform fiduciary standard for broker-dealers and investment advisors on April 15. The New Jersey plan, as Gerstein noted, “comes nearly three months to the day after Nevada proposed a similar fiduciary regulation.” New Jersey will take comments on its plan until June 14.

Like New Jersey’s proposal, the SEC’s proposed Reg BI would impose a care obligation upon broker-dealers and reps when providing recommendations, according to the Groom attorneys.

“This duty would include a best-interest standard that requires knowledge of the customer’s risk profile characteristics,” the Groom attorneys state.

However, unlike the New Jersey plan, the proposed Reg BI “does not apply a fiduciary standard to broker-dealer representatives. The SEC obligation is a best-interest obligation that does not allow the representative to place his or her interests ahead of the customer’s interest,” Groom states.

“Under this standard, some, but not all, duty of loyalty type conflicts can be mitigated through proper disclosure to the customer under the SEC’s proposal,” the attorneys write.

The proposed New Jersey regulation “explicitly states that there is no presumption the duty of loyalty is met through disclosure.”

Like Labor’s expansive rulemaking, New Jersey’s plan recommends that the fiduciary duty apply to recommendations regarding the transfer of assets to or opening of an account.

“The DOL’s definition excluded communications to independent fiduciaries with investment expertise where it was understood that no investment advice was intended,” Groom said. “A similar exclusion is contained in the New Jersey proposal. SEC’s proposed Regulation Best Interest also applies only to ‘retail investors’ rather than parties deemed to have sufficient sophistication and bargaining power.”

While the Labor rule is widely viewed as having been more onerous than the SEC’s proposed Reg BI, New Jersey’s proposal “goes even further,” the attorneys state.

“DOL’s rulemaking acknowledged that it is possible to provide one-time recommendations without establishing an ongoing fiduciary duty,” Groom said. “New Jersey’s proposed obligation will extend for the life of the relationship whether that be a brokerage relationship or an advisory relationship if investment advice is provided,” a move intended to reduce confusion when dual registered persons provide both brokerage recommendations and investment advice.

“Therefore, only broker agents who act in a broker-only capacity have the ability to have the fiduciary obligation extinguish upon execution of the recommended transaction,” Groom states.

Further, for both advisors and reps, “there is a presumptive breach when the recommendation is not the best of the reasonably available options. The DOL’s rulemaking and the SEC’s proposal both recognized the impossibility of demonstrating that there is one absolute best investment option,” the attorneys state.

An important question regarding the New Jersey proposal, the attorneys say, is: “How much the ‘reasonably available’ phrase qualifies ‘best.’ Is reasonably available every publicly offered option? Is it only the options the recommender can offer? Does best of the reasonably available fee options mean that a provider must match and best the discounts offered by every competitor?”

ERISA Carve-Out

Importantly, the attorneys state, “for those in the retirement services space, New Jersey’s proposal also does not apply to persons acting in the capacity of ERISA fiduciaries.”

What does this mean? Fiduciary proposals in other states “have faced allegations that, as applied to ERISA covered accounts, ERISA would preempt the state law,” the attorney explain.

Under the Securities Exchange Act, state initiatives cannot impose additional capital, custody, margin, financial responsibility, making and keeping of records, bonding, or financial or operation reporting requirements on broker-dealers, the attorneys write.

“Other state initiatives, such as the Nevada initiative, are alleged to violate this provision by requiring additional record-keeping to prove compliance,” according to the attorneys.

“It seems likely that the two provisions included in the New Jersey proposal carving out ERISA fiduciaries and stating that no additional recordkeeping requirements are imposed upon brokers were included as an attempt to stave off the two preemption challenges that predominate state fiduciary duty initiatives.”

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