New Jersey is determined to finalize its fiduciary rule for the investment advice industry despite the threat of being preempted by the SEC’s Regulation Best Interest Rule, according to Christopher Gerold, chief of the New Jersey Bureau of Securities.
The bureau is also undeterred by the criticism from the broker-dealer community that having a patchwork of regulations on the standard of conduct of financial professionals will hurt the industry.
“My belief is [what should prevail] should be the highest common denominator when you are talking about a standard of care when people are investing their life savings,” Gerold said.
He made the comments Thursday at the Practising Law Institute’s Broker-Dealer Regulation and Enforcement 2019 seminar in New York.
When the issue of the SEC’s Reg BI potentially preempting New Jersey’s planned fiduciary rule was raised at the seminar, Gerold was unperturbed.
“Preemption has been around for 100 years, and I don’t think that as a state regulator, you can regulate out of fear. Certainly, that’s not the way I run my agency. I can’t be concerned all the time about preemption. Most of the regulators are going to regulate as they see fit,” he said.
Which law comes first?
Preemption means that a federal law, such as the SEC's regulations would override and thus nullify a state law.
“Is preemption a concern? Yes, in part. But I don’t believe that’s any way for a regulator to do their job,” he added.
He acknowledged that he has also heard the argument against “a patchwork of regulations” too many times, but believes that multiple state laws “will work.”
When asked about the status of New Jersey’s fiduciary rule, Gerold replied: “We are currently in the rulemaking process. Now we’re in the process of reviewing all the comments we received on our proposal.”
Gerold noted that compared with Massachusetts, which issued a “pre-proposal” for a fiduciary rule in June, “New Jersey is far along in the process.”
He declined to estimate when New Jersey would be ready with the final version of its fiduciary rule.
When pressed by FA-IQ for a timeline, he was only willing to reply: “The Administrative Procedures Act says that a rule should be adopted one year from the date of publication, which is April 14.”
New Jersey Bureau of Securities
The New Jersey fiduciary rule proposal requires all investment professionals registered with its Bureau of Securities to act as fiduciaries to their customers when providing investment advice or recommending an investment strategy; when opening or transferring assets to any type of account; or the purchasing, selling or exchanging any security.
“What the rule does is it makes it a dishonest or unethical business practice for an advisor or a broker-dealer [firm] or its agent to fail to act in accordance with a fiduciary duty to customers when making recommendations or providing investment advice,” Gerold said.
“In accordance with the common law definition of fiduciary duty, it will require that both the duty of care as well as the duty of loyalty must be satisfied,” he added, noting the language in the initial fiduciary rule proposal without revealing the proposal’s current content.
“This is the proposal. How the rule will look like, I’m not going to say. We’re reviewing all the comments still,” he said.
Wearing two hats
Gerold, who began serving in September a one-year term as president of the North American Securities Administrators Association, also pointed out he wears the “NASAA president hat” when dealing with the SEC’s Reg BI and the states’ desire to establish independent fiduciary rules.
“Most states in their regulations have the word suitability. What does this mean now [that Reg BI exists]? Do states have to change their rules? Should the states’ rules mirror Reg BI or should they say something different? This is something that NASAA is contemplating,” Gerold noted.
“But keep in mind every jurisdiction has to make its own decision. Even if NASAA would come up with a rule, it would be up to the states to adopt it,” he added.
He said that where state regulators are concerned, “they are doing as they feel they need do to protect the investors in their jurisdictions.”
Nevada passed and signed into law its Senate Bill 383, subjecting broker-dealers and advisors — effective July 1, 2018 — to the Nevada Revised Statute for financial planners, NRS 628A. The law effectively imposes a statutory fiduciary duty on broker-dealers and advisors to act in the best interest of their clients and comply with disclosure requirements. Nevada is working on the fiduciary rule it proposed in January.
In June, the Massachusetts Securities Division of the Office of the Secretary of the Commonwealth sought comments on its proposal to apply a fiduciary conduct standard to broker-dealers, agents, investment advisors, and investment advisor representatives when dealing with their customers and clients. That comment period ended in July.
Tens of thousands of brokers and registered representatives stand to be affected by these pending state initiatives. There were 4,949 broker-dealer branches in New Jersey, 3,625 in Massachusetts and 1,278 in Nevada as of 2017, the latest data released by self-regulator Finra. Combined, those three states made up 6% of the total broker-dealer branches in the U.S. in 2017.