New Jersey

New Jersey extends comment period for fiduciary proposal; schedules hearing

Two developments re. the NJ uniform fiduciary duty proposal:

  1. The comment period has been extended to July 18.
  2. A public hearing on the proposal will be held on July 17 from 9:30 am to 4:30 pm in the Morris Room at the Division of Consumer Affairs, 124 Halsey Street, 6th Floor, Newark, NJ 07101.

Today is the deadline to submit comment letters on the NJ uniform fiduciary duty rule proposal

A copy of the proposed rule can be found here.

A timeline of the long road of fiduciary/best interest rulemakings

New Jersey is the state to watch

New Jersey is emerging as the state to watch (at least for now) in terms of fiduciary developments. In September of last year, Governor Phil Murphy marked “the 10-year anniversary of the 2008 global financial crisis by announcing plans to issue a rule strengthening the standards for investment professionals in New Jersey to better protect residents seeking to invest their life savings and to close a regulatory gap in federal oversight that helped fuel the economic meltdown a decade ago.” The Bureau of Securities quickly followed suit by proposing a far-reaching regulation that would impose stringent fiduciary duties on broker-dealers for various communications with retail investors. Meanwhile, New Jersey Senator Patrick Diegnan, Jr. has introduced legislation (S 735) in the Senate that would impose disclosure obligations on broker-dealers that are not subject to fiduciary duties (an identical bill has also been introduced in the General Assembly). We have previously noted the similarities of the proposed New Jersey legislation with a bill introduced in New York.

It’s unclear whether the New Jersey legislation is on a separate track  and, therefore, could pass or fail irrespective of whether the Bureau of Securities moves forward with its own regulation. If the proposed legislation and regulation are viewed by New Jersey as more of a package, then one wonders how they should interact, if at all. A few points:

  • The proposed regulation clearly reflects a skepticism of disclosure as a way to address investor confusion and conflicts of interest.  In fact, the regulation says that there is no presumption “that disclosing a conflict of interest in and of itself shall satisfy the duty of loyalty.” As we indicated in our analysis, “The Bureau was dismissive of the value of disclosures, citing evidence that simply disclosing conflicts does not provide adequate protection and does not shield investors from potential financial harm of conflicted advice. This approach is notably different from that of the federal Investment Advisers Act of 1940, which casts its fiduciary duty in disclosure terms.”
  • Yet, the legislation is almost entirely disclosure-based. As proposed, broker-dealers not subject to a fiduciary duty would be compelled “to make a plain language disclosure to clients orally and in writing at the outset of the relationship that ensures that individual investors are aware of potential conflicts of interest.  The required disclosure shall state the following: “I am not a fiduciary.  Therefore, I am not required to act in your best interests, and am allowed to recommend investments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks, and expected returns for you.”
  • For all practical purposes, the legislation assumes somewhat of a fixed  fiduciary status, yet the regulation would attach to some communications/conduct, and not others. True, the legislation could in theory apply on a communication-by-communication basis, but is that realistic? You decide. The legislation states: “Any investment advisor that is subject to a fiduciary duty under law or applicable standards of professional conduct with respect to certain types of investment advice, but not others, shall:(1)  make a plain language disclosure to clients orally and in writing at the outset of the relationship that ensures the individual investors are aware of the extent to which the fiduciary duty does and does not apply; and (2)  comply with the other requirements of this section in any investment advice situation in which a fiduciary duty does not apply.”
  • Should the regulation ultimately include a safe harbor for following the disclosure rules in the legislation (assuming the legislation is passed)?

The Bureau of Securities explicitly stated that it believed “that the SEC Regulation Best Interest does not provide sufficient protections for New Jersey investors.” Similar statements have been made by public officials in the state. New Jersey is clearly motivated. It seems unlikely, then, that New Jersey will view SEC Regulation Best Interest, and even complementary guidance/rules from the Department of Labor, as sufficient. The regulation, and even possibly the legislation, seems poised to more forward.

But the legislation and regulation operate in the same universe. How will they interact with each other and be revised, as necessary, to address the concerns for retail investor protection, while also remaining practically and efficiently implemented and enforced?

The comment period for the proposed regulation closes on June 14.

How the states are trying to revive the DOL fiduciary rule

Wealth Management Magazine just ran a story on how the states are attempting to revive the DOL Fiduciary Rule in their own image. As part of my interview, I say: “To me, there’s no question that the Department of Labor fiduciary rule is a bit of the ideal paradigm in terms of governance (for these states).” This is true, but the DOL rule appears to also be a litmus test for some of the states in evaluating Regulation Best Interest (Reg BI) and their own rules. As some states try to channel the DOL Fiduciary Rule, Jay Clayton and Alex Acosta are, by all, accounts, coordinating on a June unveiling of the SEC Standards of Conduct package with a  proposed DOL exemption and some guidance (i.e., not a new rule on when one becomes an investment advice fiduciary under section 3(21) of ERISA) to follow.

The NJ fiduciary proposal: “qualitatively different” than the DOL fiduciary rule?

In a recent interview with Fund Intelligence, I discuss why I think the 2016 Department of Labor Fiduciary Rule is qualitatively different from the New Jersey fiduciary proposal.

George Michael Gerstein to Compliance Reporter: Reg BI is a world unto itself and unlikely to be changed due to NV and NJ fiduciary proposals

Stradley Ronon’s Fiduciary Governance Group cited for identifying state-wide trends on fiduciary legislation

The Fiduciary Governance Group’s tracking and analysis of the various state fiduciary developments was referenced in a recent planadviser article on New Jersey’s new proposal.

Jackson thinks a strong enough Reg BI might allay the states