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.

“In other words, a broker-dealer who is a dual registrant would be required to provide ongoing advisory services to its brokerage customers pursuant to a brokerage account agreement that likely provides for transaction-based compensation,” Traxler said.

“Obligating broker-dealers (and their agents) who are dual registrants to an ongoing fiduciary standard for solely incidental investment advice provided to a brokerage customer, as contemplated by the proposal, could result in many New Jersey investors with a small or moderate amount of investable assets to lose access to their chosen financial professional," she said.

When faced with the increased costs associated with monitoring customers’ accounts on an ongoing basis, “a broker-dealer would be forced to either move their brokerage customers to fee-based advisory accounts (but only if it is the 'best of the reasonably available options') or cease providing brokerage services to those customers’ accounts altogether,” Traxler said.

“Many negative unintended consequences will result if New Jersey investors lose access to financial professionals as a result of the proposal,” she added.

The association also noted that FSI members operating in the state generate $2.2 billion of economic activity, supports 22,761 jobs, contribute nearly $10 million annually to state and local government taxes and account for about 11 percent of the financial services industry contribution to the state economy.

Policy experts believe the SEC’s reluctance to hold broker-dealers to a fiduciary standard will lead to an increase in state actions. Nevada has a similar proposal in the pipeline as New York battles it out in court with the securities industry over its rule to apply a fiduciary standard to annuities sales.