State Wants New Anti-Conflict Standard for Financial Advisers

Installing ‘fiduciary’ rule at the state level would replace federal regulation that was set aside by the courts

New Jersey Attorney General Gurbir Grewal
New Jersey would impose its own tough regulations to protect residents from conflict of interest by financial professionals under a new rule being proposed by the state’s Attorney General’s Office and Bureau of Securities.

Known as a “fiduciary rule,” the proposed regulation mirrors a financial reform that was once in place at the federal level in the wake of the Great Recession that required those providing investment advice to put their customers’ interests ahead of any other concern.

The announcement of the proposal earlier this week triggers a formal rule-making process that could result in the New Jersey fiduciary rule taking effect later this year or early next year.

Only a handful of states have pursued such action in response to ongoing regulatory uncertainty at the federal level. Gov. Phil Murphy, a first-term Democrat, said the new rule sets New Jersey up to have one of “the strongest investor protections in the nation.”

But the Financial Services Institute, a group that represents financial advisers and financial-services firms, said New Jersey should defer to the federal government on such issues so there isn’t a “patchwork” of state-specific financial regulations established across the nation.

Void left at the federal level

The federal fiduciary rule was established by the U.S. Department of Labor during the tenure of former President Barack Obama. It sought to protect consumers when they seek advice on investment strategies, such as those for retirement planning, by forcing financial professionals to put the customers’ best interest ahead of any benefits the adviser could receive through things like commissions and referral fees. The new standard was praised by consumer advocates after it was proposed in 2016, but it also drew sharp criticism from groups like the U.S. Chamber of Commerce, and was eventually overturned by a federal appeals court in 2018.

State lawmakers introduced a measure last year that urged the administration of President Donald Trump to pursue a new federal fiduciary policy more aggressively. But the proposal put forward this week would effectively re-establish the standard in New Jersey via the regulatory process.

Announced by Attorney General Gurbir Grewal, the state proposal calls for all broker-dealers and their agents who are registered with the state Bureau of Securities to begin following the fiduciary standard instead of the less stringent “suitability” requirement. Grewal’s office suggested the lesser standard — requiring only that the recommended investment be “suitable” to the needs of the client — is prone to conflicts of interest and excessive fees.

“If the federal government won’t act to protect investors, then we will,” Grewal said.

The new rule would also extend the fiduciary standard to the execution of any investment recommendation, and throughout the entire relationship that a financial professional has with the customer, according to the state Attorney General’s Office. There would also be no presumption that disclosing a possible conflict of interest will resolve any issues of potential dual loyalty.

“The rule we’re proposing codifies a standard that most investors believe they are already receiving from their financial professionals,” said Christopher Gerold, chief of the state Bureau of Securities. “We believe we have crafted a sound, sensible rule that not only fulfills our duty to safeguard investors, but also protects the integrity of the financial markets.”

Public-comment period

By proposing the rule publicly through the New Jersey Register, the state has started a 60-day public-comment period that runs to June 14. After that, the Murphy administration would publish a response to the public comments in the fall, with final adoption of the rule occurring 90 days thereafter.

Murphy, a former executive of the Wall Street investment bank Goldman Sachs, as a candidate called to strengthen consumer-financial protections in response to actions taken by the Trump administration. The governor also proposed establishing a public bank in New Jersey, something that’s in place in only one other state.

Murphy took aim again at the Trump administration in a statement that was released with the announcement of the new rule by the state Attorney General’s Office.

“We are strengthening the integrity of New Jersey’s financial services industry by proposing some of the strongest investor protections in the nation,” Murphy said. “At a time when the federal government is undermining the consumer protections implemented in the wake of the 2008 economic crash, we are committed to ensuring our residents and families are protected from predatory financial practices.”

Industry worries about ‘patchwork’ of regulations

The proposal was not embraced by the Financial Services Institute, one of the groups that successfully challenged the fiduciary rule that had been in place at the federal level.

“While we are still in the process of thoroughly analyzing the proposal, we remain firm in our stance that states should refrain from issuing their own fiduciary duty rules,” said David Bellaire, the organization’s executive vice president and general counsel.

“FSI has long supported a federal uniform standard of care for all investment advice, and we believe the SEC is the appropriate authority to develop such a standard,” he said, referring to the federal Securities and Exchange Commission. “State-specific standards will lead to a patchwork of varying requirements across the country, confusing investors and creating uncertainty for advisors who are trying to best serve their clients while also obeying state and federal regulations.”

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