A stricter regulation requiring brokers to adhere to a fiduciary standard, such as the one being enacted in New Jersey, should make compliance easier for brokers, according to Laura Posner, formerly the top securities regulator in New Jersey.
“States are closer to the issue than the federal government and are the most appropriate entity to act on behalf of the investor,” said Posner, who was bureau chief of the New Jersey Bureau of Securities. She is now a partner at Cohen Milstein Sellers & Toll on the law firm’s securities litigation and investor protection, and ethics and fiduciary counseling practice groups.
“It is not a competition” between state regulators and the Securities and Exchange Commission, she added.
The New Jersey Bureau of Securities is in the process of enacting a regulation creating a unified fiduciary standard for anyone providing investment recommendations, including brokers as well as financial advisors. A comment period already was held on a similar proposal last year, so no further comment period is needed and this rule could be in place by mid-July. A similar rule was defeated in Maryland last year and some other states are considering such rules.
The activity on the state level is being prompted in part by the lengthy process anticipated for the SEC to consider a similar rule on the federal level, and the defeat of a fiduciary rule that was to be enacted and then withdrawn by the federal Department of Labor.
“Many investors are not aware that brokers offering investment advice do not have to adhere to a fiduciary duty,” Posner said. “Investors assume the brokers are acting in their best interest.” Brokers now have to adhere to a less strict suitability standard, which only guarantees the advice is suitable for the client, not that it is the best available. Under a suitability standard a broker could be swayed by his or her own financial interests.
“The New Jersey rule is consistent with what the North American Securities Administrators Association has recommended,” she said. The financial industry is moving towards all representatives and advisors who offer financial advice having to abide by a fiduciary rule, putting the clients’ needs first.
Having separate state regulations will not result in a conflict between the states.
“States do a good job of coordinating activities,” Posner said. “Also, the industry will adapt to meet the highest standards, just like automobile companies produce cars to meet the higher fuel standards of California. The states have been very clear about their willingness to work with the SEC in developing a fiduciary standard for brokers.”
The Financial Services Industry and the Securities Industry and Financial Markets Association are arguing that having states enact individual rules will result in a hodgepodge of regulations and that the industry should wait for the SEC to act.