New Jersey’s push for its own fiduciary rule is turning into a Battle Royale, pitting the nation’s largest Wall Street and broker-dealer associations against comparatively tiny fiduciary advisor and financial planning associations.

The groups are set to war over what legal standard brokers should be held to when they work with consumers.

Today, representatives from both sides testified during a second round of hearings on a “pre-proposal” put out by the New Jersey Bureau of Securities, which would require that broker-dealers, agents, investment advisors and investment advisor representatives be subject to a fiduciary duty.

“Specifically, the Bureau is considering making it a dishonest or unethical business practice for failing to act in accordance with a fiduciary duty when recommending to a customer, an investment strategy, or the purchase, sale, or exchange of any security or securities, or providing investment advisory services to a customer,” the bureau's proposal says.

The bureau says the state rule is needed because federal regulators have not done enough to elevate broker advice standards, and it wants to "reduce investor confusion and harmonize regulatory enforcement."

New Jersey's pre-proposal is out for comment until December 14. The state's regulators, who are in the unique position to institute regulations without legislative action, said they plan to introduce a proposal in the next 60 to 90 days. The state said it wants the proposal to address the "regulatory gap" that leaves investors "unaware of whether and to what extent those they trust to make financial recommendations are receiving undisclosed financial benefits in exchange for steering their clients to certain products."

That has Wall Street crying foul. To date, attorneys representing the Securities Industry and Financial Markets Association (SIFMA) and many of the same Wall Street associations that quashed the Department Of Labor’s fiduciary rule in federal appeals court earlier in the year have warned New Jersey that any rulemaking on the state’s part would meet with a similar fate -- an expensive loss in court. Instead, the broker-dealer industry argued, New Jersey should wait until the Securities and Exchange Commission finalizes its Regulation Best Interest, which they assert will do a fine job of elevating broker conduct standards.

Brad Campbell, a partner with Drinker, Biddle representing the U.S. Chamber of Commerce, told New Jersey regulators today it is critical to allow the SEC to establish rules of conduct for brokers. Campbell also argued that state rules that don’t track with the SEC’s would be duplicative, create investor confusion and hurt investor access to investment products. The U.S. Chamber was one of the plaintiffs who successfully sued the DOL to overturn its rule holding brokers to a fiduciary standard.

Said Campbell: “Rather than increasing access to quality financial advice for our members, the DOL rule reduced access to advice. In fact, the very retirement savers who most needed assistance, those who were starting to save or who had small account balances, often found fewer advisors who could help them, paid higher costs when able to receive advice, and had access to fewer types of investment products and services.”

In truth, the fiduciary rule presents major legal hurdles for broker-dealers and Wall Street firms that accept significant payments to push certain products on their sales platforms. Such products may not meet fiduciary standards that require brokers to operate in clients’ best interests. Broker-dealers also create their own proprietary products that can be significantly pricier and underperform comparable investments. These “conflicted” products can even include b-d money market accounts, which in recent days have paid 1.5 percent less than the industry standard.

When he testified two weeks ago at the first of  N.J.’s hearings on its proposal, SIFMA Associate Counsel Kevin Carroll argued that it is the SEC’s role and not states’ to set broker-dealer standards when he testified two weeks ago at the first of  N.J.’s hearings on its proposal. “We urge the Bureau to await the conclusion of the SEC’s Regulation Best Interest rulemaking process before moving forward with its own fiduciary proposal,” he said.  

But N.J. has said it believes the SEC proposal does not go far enough, which is why a uniform standard is needed. "The bureau believes that this uniform standard protects investors against the abuses that can result when financial professionals place their own interests above those of their customers," the document states, noting both the lack of a Labor Department fiduciary rule, struck down by a federal appeals court, and what it suggests is a weak SEC advice proposal.

"In light of these federal developments, investors remain without adequate protection from broker-dealers, who, under the suitability standard, are permitted to consider their own interests ahead of their client's interest when making investment recommendations," N.J.’s proposal states.

On the side of advisors and planners, Financial Planning Association (FPA) representative John Crosby told N.J. regulators today that the group wants to see “a uniform fiduciary standard that would apply to both broker-dealers and investment advisors, when providing personalized investment advice to retail investors, that is not less stringent than the existing fiduciary standard under the Investment Advisers Act of 1940.”

He was joined by Institute for the Fiduciary Standard President Knut Rostad, who told N.J. regulators: “New Jersey has a unique opportunity to make an important difference in the journey of fiduciary duties in the early 21st century.” Rostad is a strong proponent of uniform conduct standards that would require brokers to mitigate conflicts of interest or obtain written consent from investors stating they have been informed of the conflicts and their implications.