Fresh off a major victory at the federal level, the securities industry is gearing for battle against a move by New Jersey to adopt fiduciary rules for broker-dealers.
In a letter to the New Jersey Bureau of Securities regarding its proposal, the Financial Services Institute said it would create havoc, coming just as broker-dealers work to come into compliance with the Securities and Exchange Commission’s just-passed best-interest regulations, called Regulation Best Interest. The deadline for implementation of the SEC’s rules is June 20, 2020.
“If FSI members are held to a unique standard of care ... these financial advisors may have to cease doing business with or cut back on financial services provided to retail investors in New Jersey. This would undoubtedly have a negative impact on New Jersey investors, particularly those [who are] low- to middle-income retail investors,” said Robin M. Traxler, FSI's senior vice president and deputy general counsel.
While the securities industry lobby has a vast presence in the states and has been able to defeat similar fiduciary legislation two years in a row in Maryland, it is less likely their lobbying will work in New Jersey.
For one, the regulation is coming from the state securities division, not New Jersey’s legislature, and it is being strongly advocated by N.J. Governor Phil Murphy, a former executive at Goldman Sachs.
"We are strengthening the integrity of New Jersey's financial services industry by proposing some of the strongest investor protections in the nation," Murphy, a Democrat, said when the proposed regulation was introduced in April.
While FSI has been arguing for years that the SEC is the right regulator to oversee the broker-dealer industry, N.J. regulators have said the SEC rule does not go far enough.
“FSI understands that the bureau considered the standard of conduct under [the SEC rule] fall short. However, FSI believes that significant changes to the adopted SEC rule requires the bureau to reevaluate the proposal,” Traxler said.
“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 the proposal,” she added.
The NJ proposal would subject every broker-dealer who is dually registered as an investment advisor to an ongoing fiduciary standard and require those that provide “solely incidental” advice to a customer to monitor its customer’s portfolios, investment strategies and investments on an ongoing basis.