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Brokerage Industry Blasts NJ Fiduciary Rule at Hearing

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Representatives of the brokerage industry were out in full force at Wednesday’s public hearing on New Jersey’s proposed fiduciary rule for BDs, opposing the rule. Two-thirds of the 30 public speakers at the all-day hearing in Newark, New Jersey, represented BDs or insurance companies; only one-third represented individual investors and favored the proposal.

The all-day hearing was largely a referendum of the Securities and Exchange Commission’s new Regulation Best Interest. Industry representatives like Kevin Carroll, associate general counsel of the Securities Industry and Financial Markets Association, argued that Reg BI precludes the need for additional regulation of BDs because the new SEC rule already “raises the bar from the existing FINRA suitability standards,” with its duty of care (advice in the client’s best interest) and duty of loyalty (putting the client’s interests before the advisor’s), full and fair disclosure obligation and policies and procedure requirements to disclose and mitigate conflicts.

Investor advocates such as Micah Hauptman, financial services counsel at the Consumer Federation of America, said Reg BI is not much different from the Financial Industry Regulatory Authority’s suitability rule and will mislead investors “into trusting their brokers are providing higher quality advance than they’re legally required to provide,” leaving gaps that the New Jersey fiduciary rule tries to fill.

According to Hauptman and other consumer advocates like Knut Rostad, of the Institute for The Fiduciary Standard, Reg BI has many gaps that are addressed by the New Jersey fiduciary rule: Reg BI doesn’t define best interest (“so BDs will,” said Rostad); doesn’t require the avoidance of conflicts of interest, only disclosure; and allows “hat-switching” by dually registered brokers who also provide investment advice which will “perpetuate investor confusion and harm,” said Hauptman.

“Give Reg BI a fair chance,” said Carroll. “Now is not the time to layer on state-specific fiduciary requirements that would add no additional investor protection value but that would be costly to implement, and that limit New Jersey investors’ choice of and access to products, services and advice.”

Industry opposition to the New Jersey fiduciary rule centered on several key issues:

Best of: the rule requires that brokers use “best of the reasonably available options” when recommending account openings, transferring assets or the purchase, sale or exchange of a specific security and charge a transaction-based fee that is “the best of the reasonably available fee options for the customer.”

“Best is not a fiduciary concept…. It is  also a practical impossibility in the real world,” said Bradford Campbell, representing the U.S. Chamber of Commerce, Center for Capital Markets Competitiveness.

Ongoing fiduciary duty obligation of dually registered brokers who provide a client investment advice as well as episodic brokerage services for the ”entire relationship.”

Carroll said, according to SEC interpretive guidance, this is inconsistent with the “solely incidental” clause of the broker-dealer exclusion from the definition of an investment adviser subject to the Investment Advisers Act of 1940, and with continuous monitoring the broker would be subject to all the requirements of that law.

State vs. federal regulations. State rules that differ from national standard for broker-dealers create a patchwork of different regulations.

“We serve clients in 21 states and those clients frequently move,” said Jim Parks, an LPL advisor and president and wealth advisor at Parks Wealth Management in Wykoff, New Jersey. “If our advice and our services have to vary from state to state, it will be very confusing to our clients and will require very substantial increased costs that they should not have to bear.”

Several of the industry representatives testifying at the New Jersey fiduciary rule hearing said firms could leave the state or scale back offerings, depriving residents of the variety of products and services.

Hauptman said it was “highly doubtful that all, or even many, of them will follow through” on the threat of leaving, which would be “an immediate black eye for any firm that decided to take that approach and would tell the public everything they need to know about that firm’s commitment to investors, not just within New Jersey, but nationally.”

Perhaps more important in any decision to go or stay is the wealth that resides in the garden state. According to the U.S. Census Bureau’s American Community Survey, the median household income in New Jersey was $80,088 in 2017, the second highest in the nation after Maryland.

The New Jersey Bureau of Securities, part of the Division of Consumer Affairs, will now review testimony and comments on its proposal before deciding on next steps. The earliest possible enactment of the rule would be one year from the date of publishing, or April 15, 2020.

A final rule would likely be challenged in court. Campbell, representing the U.S. Chamber of Commerce, which was a plaintiff in the lawsuit that successfully challenged the Department of Labor’s fiduciary rule several years ago, said as much at the hearing.

David Bellaire, Executive Vice President and General Counsel of the Financial Services Institute (FSI), which was another plaintiff in the DOL lawsuit, provided the rationale for legal action. The New Jersey fiduciary proposal conflicts with the Congressional intent of the Investment Adviser’s Act of 1940 and is pre-empted by the National Securities Markets Improvement Act, which prohibits states from requiring BDs to keep different or additional records from those required by federal rules, said Bellaire.

New Jersey is not alone in this effort. Nevada has proposed a fiduciary rule for broker-dealers, Massachusetts is working on one and a New York legislator is expected to revive his previous bill. A Maryland bill that died in the legislature this past spring could also be revived.

But if New Jersey succeeds in enacting a  fiduciary rule for BD it could have a nationwide impact, resetting the conduct standards of broker-dealers, said Rostad.

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