On April 15, the New Jersey Bureau of Securities (the “Bureau”) issued a rule proposal to establish a uniform fiduciary duty standard applicable to investment advisers, brokers-dealers and their registered representatives and agents. Specifically, the proposed rule (N.J.A.C. 13:47A-6.4), which could take effect as early as the end of the year, will require all investment professionals registered with the Bureau to provide investment advice, recommend investment strategies, open or transfer assets to any type of account, or make the purchase, sale, or exchange of any security without regard to their company’s (or their own) interest.
While the proposed rule merely codifies the fiduciary duty already owed to customers by investment advisers, it would impose a heightened standard of care on broker-dealers. Currently, broker-dealers and their representatives are subject to the suitability standard, which requires them to hold a reasonable belief that recommended transactions or investment strategies are suitable for their customers. If the proposed rule is implemented, brokers will also owe their customers a statutory duty of care and a duty of loyalty, requiring them to make recommendations about securities and provide investment advice “without regard to the financial or any other interest of the broker-dealer, agent, adviser,” or any other third-party.
The Bureau believes the proposed uniform standard will “protect investors against abuses that can result when financial professionals place their own interests above those of their customers, will help to reduce confusion, and will work to foster public confidence in the financial profession,” noting that “retail investors do not understand the differences between investment advisers and broker-dealers or the standards of care applicable,” specifically in the context of dual registrants.
Additionally, in an effort to address the Bureau’s concern about incentives (i.e., sales contests), the proposed rule also creates a presumption that the duty of loyalty is breached where an investment professional offers or receives any compensation when recommending or trading in customer accounts securities that are “not the best of the reasonably available options.”
The Bureau’s rule proposal comes as other states, including Connecticut, New York, and Nevada, similarly have proposed new rules and regulations governing the conduct standards of broker-dealers and investment advisers. The varying state-level approaches have led some financial industry groups to express concerns about “patchwork” state-level regulation and inconsistent conduct standards across state lines. At the same time, the SEC is expected to finalize its proposed Regulation Best Interest—which would set forth a nationwide standard of conduct—this year. The interplay between Regulation Best Interest and state-level rules—including New Jersey’s, if codified—could lead to litigation over the preemptive effect of SEC rulemaking in this arena. Indeed, some industry groups have already argued that state-level laws imposing heightened standards of conduct create implicit or explicit recordkeeping requirements and are thus preempted by the National Securities Markets Improvement Act of 1996, which sets forth recordkeeping requirements for advisers and brokers. As states codify laws governing brokers and advisers within their jurisdiction, these preemption arguments are likely to come to the forefront.
The Bureau is accepting written comments regarding the proposed uniform fiduciary rule through June 14, 2019. In the meantime, firms conducting securities business in New Jersey should consider reviewing their policies and procedures to assess the need for potential enhancements in anticipation of the heightened standard of care.
Should you wish to discuss (1) the requirements and/or implications of the Bureau’s rule proposal, or (2) submitting comments on the proposal to the Bureau, please contact any of the authors or any of McGuireWoods’ securities enforcement and regulatory attorneys.