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Regulation and Compliance > State Regulation

Trade Groups Press New Jersey to Embrace SEC's Reg BI, Drop Fiduciary Plan

By Melanie Waddell

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With a final Regulation Best Interest in hand, trade groups are urging the New Jersey Bureau of Securities to embrace the Securities and Exchange Commission’s federal standard, so as not to create a patchwork of state rules.

New Jersey stops taking comments on its uniform fiduciary standard for broker-dealers and investment advisors Friday. On April 15, the state proposed its rule, which would require all investment professionals registered with the state’s Bureau of Securities to place the interests of their clients above their own when recommending securities or providing investment advice.

The bureau has stated that the purpose of its proposal is to “establish a uniform standard for financial professionals and rectify investor confusion that results from the lack of uniformity.”

A recent analysis by Groom Law Group said New Jersey’s plan “far exceeds” Reg BI as well as the Labor Department’s now defunct fiduciary rule.

In a Friday comment letter, the Financial Services Institute told the state bureau that it should reconsider the final Reg BI as it includes “significant changes.”

FSI also noted that there are “significant differences” between New Jersey’s proposed rule and the final Reg BI, which will lead to investor confusion.

“If the Bureau chooses to move forward with its proposal, FSI strongly encourages it to align its requirements with those of Regulation Best Interest,” FSI said.

Reg BI “provides a model for the types of disclosures that allow retail investors to make informed decisions about the services and products they choose,” FSI wrote. “FSI recommends that the Bureau consider aligning its proposal with Regulation Best Interest or alternatively providing that a broker-dealer’s substantial compliance with Regulation Best Interest would satisfy the requirements” under its plan.

FSI stated that the trade group is “confident that the [SEC] has achieved this goal through its most recent rulemaking package, which includes Regulation Best Interest, a best interest standard of conduct applicable to broker-dealers, and a separate interpretive guidance on the fiduciary duty applicable to investment advisers.”

The American Securities Association also urged New Jersey to adopt Reg BI.

“New Jersey should adopt the SEC’s national Reg BI standard and not create a patchwork of unworkable state regulations that would only cause confusion across the financial industry and harm New Jersey residents saving and investing for a better future,” said ASA CEO Chris Iacovella.

ASA, Iacovella wrote, believes the “standards laid out in the New Jersey Proposals directly undermine the consumer protections set forth in Reg BI’s national best interest standard. Adopting a different approach from the SECs national standard will confuse residents, financial professionals, and firms in New Jersey.”

Industry groups like Better Markets, the Consumer Federation of America and Fund Democracy, however, voiced support for New Jersey’s fiduciary plan.

“Consistent with the advisory role that they play, the proposal requires both broker-dealers and investment advisers to comply with a common law fiduciary duty and applies that standard across a broad range of advisory activities,” the groups wrote in their joint comment letter.

“Specifically, the proposal would make it a dishonest and unethical business practice if a broker-dealer or investment adviser provides advisory services while failing to act in accordance with a fiduciary duty.”

The proposed uniform fiduciary standard “stands in stark contrast to the SEC’s Regulation Best Interest, which maintains different standards for investment advisers’ and broker-dealers’ advice — one standard that is called a fiduciary duty and one that is not, though neither standard provides the protections associated with a meaningful fiduciary duty,” the groups said.

By applying “a strong uniform fiduciary standard to both types of advisory relationship, the New Jersey proposal would ensure that, regardless of what type of professional an investor works with or the type of account they use, they would be protected by the same strong protections.”

SEC Reg BI and State Law Preemption

Industry officials and attorneys have also been debating the impact of the SEC choosing not to state whether Reg BI preempts state law.

ASA’s Iacovella told ThinkAdvisor in an email that the SEC “did not have to say Reg BI specifically preempts state law; it is the only entity charged by statute with creating and enforcing the securities laws across the United States. The purpose of the Exchange Act and the Securities Act was to give the SEC the power to create and regulate a national market so that businesses did not have to comply with laws in 50 different states.”

Stradley Ronon attorneys write in a recent legal brief that the SEC states “that the preemptive effect of Regulation BI on any state law governing the relationship between regulated entities and their customers would be determined in future judicial proceedings based on the specific language and effect of that state law,” noting that SEC Chairman Jay Clayton indicated on June 5, when Reg BI was passed, that “he hoped that states would work with the SEC going forward.”

The attorneys also noted that a broker-dealer will not be able to waive compliance with Reg BI, nor can a retail customer agree to waive his or her protections under Reg BI.

The SEC also “does not believe Regulation BI creates any new private right of action or right of rescission, nor does it intend such a result,” the attorneys said.

In commenting on the final Reg BI, Michael Pieciak, president of the North American Securities Administrators Association and commissioner of the Vermont Department of Financial Regulation, said that “state securities regulators have held state-registered investment advisers to a rigorous fiduciary duty standard and have long advocated for a robust broker-dealer conduct standard so all investors can have confidence that their financial professionals put them first; and will continue to do so.”

State securities regulators “thank and appreciate the SEC’s willingness to engage with us during this important rulemaking,” Pieciak said, adding that state securities regulators are “closely reviewing” the lengthy and complex new rules “against our comment letters and look forward to discussing our findings and next steps with our membership.”

— Related on ThinkAdvisor:

Melanie Waddell

@Think_MelanieW

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