Attorney General Gurbir S. Grewal and the Bureau of Securities within the Division of Consumer Affairs today proposed a new rule to strengthen investor protections in New Jersey by requiring all investment professionals registered with the Bureau to place their customers’ interests above their own when recommending securities or providing investment advice.
The proposed rule, published today in the New Jersey Register, requires all registered financial services professionals to act in accordance with the fiduciary duty to their customers when providing investment advice or recommending to a customer an investment strategy, the opening of or transfer of assets to any type of account, or the purchase, sale, or exchange of any security. Conduct falling short of this fiduciary duty would, under the proposed rule, constitute a “dishonest and unethical practice.”
New Jersey would be among the first states to adopt a uniform fiduciary standard, one of the many financial reforms widely sought by consumer advocates and many members of the financial industry after the 2008 financial crisis.
With this proposed rule, New Jersey once again reaffirms its commitment to providing its citizens with the protections they deserve when federal regulations fall short.
“Today, we are strengthening the integrity of New Jersey’s financial services industry by proposing some of the strongest investor protections in the nation,” said Governor Phil Murphy. “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."
“If the federal government won’t act to protect investors, then we will,” said Attorney General Grewal. “Today, we are fulfilling Governor Murphy’s promise to strengthen financial protections for New Jersey residents. The rule we’re proposing will provide important safeguards for New Jersey’s families when they invest, save, and plan for their future.”
Most investors assume all financial professionals are obligated to provide unbiased advice. But under current federal standards, only investment advisers and their representatives have a fiduciary duty to put their clients’ interests above their own.
In a distinction not often recognized or understood by investors, broker-dealers and their agents—who provide similar financial services—are subject to a less stringent duty to provide recommendations that are merely “suitable” for their clients. Critics of the suitability standard say it leaves investors vulnerable to conflicts of interest and excessive fees.
Moreover, many broker-dealer agents are also investment adviser representatives, compounding investor confusion. These dual registrants can “switch hats” when dealing with the same customers, thereby blurring the lines between investment advisory services and sales services.
“Investors should be able to trust that they are not receiving conflicted advice when investing their hard earned savings,” said Paul R. Rodríguez, Acting Director of the Division of Consumer Affairs. “We are ensuring that all registered financial professionals put their clients’ interest first by requiring that they owe the same duties of care and loyalty to their customers, regardless of the title they choose to use. Nothing short of that provides investors with the protections they deserve.”
The proposed new N.J.A.C. 13:47A-6.4 sets forth the following conditions:
It is a dishonest or unethical business practice for an adviser, broker-dealer, or its agent, to fail to act in accordance with a fiduciary duty to a customer when making a recommendation or providing investment advice. The proposed rule applies to recommendations of an investment strategy, the opening of or transfer of assets to any type of account, or the purchase, sale, or exchange of any security.
In accordance with the common law definition of fiduciary duty, both the duty of care and duty of loyalty must be satisfied.
For purposes of the duty of care, the broker-dealer, agent, or adviser must make reasonable inquiry, including risks, costs, and conflicts of interest related to the recommendation or investment advice, and the customer’s investment objectives, financial situation, and needs, and any other relevant information.
The recommendation or the advice provided to the customer must be made without regard to the financial or any other interest of the broker-dealer, agent, adviser, any affiliated or related entity, and its officers, directors, agents, employees or contractors, or any other third-party.
When a broker-dealer or its agent makes a recommendation, the fiduciary duty obligation extends through the execution of the recommendation and shall not be deemed an ongoing obligation.
Transaction-based fees are allowed in certain circumstances provided that the fee is reasonable and is the best of the reasonably available fee options for the customer, and the duty of care is satisfied.
To address the concerns over dual registrants “switching hats” when dealing with the same customer and the resulting investor confusion, the fiduciary duty obligation shall be applicable to the entire relationship with the customer on an ongoing basis.
Harmful incentives, such as sales contests, that encourage and reward conflicted advice are presumptively invalid.
There is no presumption that disclosing a conflict of interest in and of itself will satisfy the duty of 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 New Jersey Bureau of Securities. “We believe we have crafted a sound, sensible rule that that not only fulfills our duty to safeguard investors, but also protects the integrity of the financial markets.”
There will be a 60-day public comment period during which stakeholders have an opportunity to submit written comment on the proposed rule.
After the close of the public comment period on June 14, 2019, the Bureau of Securities will review all comments. A summary of the public comments and the Bureau’s response to them will be published in a Notice of Adoption expected sometime in the fall. Upon publication of the Notice of Adoption, the rule becomes final and will take effect in 90 days.