The Garden State has formally proposed a new uniform fiduciary standard – and there’s some good news for 401(k) plan advisors.
Issued April 15 by New Jersey Attorney General Gurbir Grewal and the state’s Bureau of Securities, the proposed rule would establish by regulation a common law fiduciary duty and apply it to broker-dealers and agents, and codify it for investment advisers and investment adviser representatives, requiring such professionals registered with the Bureau to place their customers’ interests above their own when recommending securities or providing investment advice.
The fiduciary duty would apply to investment advice or recommendations to a customer regarding 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,” according to an announcement by the state’s Consumer Affairs Division.
Exception for ERISA Fiduciaries
Unlike some other states, however, the proposed regulation includes a provision specifying that it does “not apply to a person acting in the capacity of a fiduciary to an Employee Benefit Plan, its participants, or beneficiaries, as those terms are defined in ERISA.”
In addition to the provisions described above, the following conditions would also apply under the proposed rules.
- 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, as well as any other relevant information.
- The recommendation or advice provided must be made without regard to the financial or any other interest of the broker-dealer, agent, adviser, or any affiliated or related entity or 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 would be allowed, 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 concerns over dual registrants, the fiduciary duty obligation would be applicable to the entire relationship with the customer on an ongoing basis.
- 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 proposed rule and information on how to submit a comment by June 14 can be viewed on the Consumer Affairs Division’s website, here. 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, after which the rule will take effect in 90 days.
Going it Alone on Consumer Protections
Alluding to the demise of the Department of Labor’s fiduciary rule and what it calls the lack of a true fiduciary duty in the SEC’s Regulation Best Interest, the Bureau explains that it determined to proceed with its rulemaking despite the input from some commenters urging it to wait until the SEC completed action. “The Bureau believes that the SEC Regulation Best Interest does not provide sufficient protections for New Jersey investors,” the proposal states. “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,” notes Paul Rodríguez, Acting Director of the Division of Consumer Affairs.
In an October 2018 comment letter on the state’s pre-proposal, the American Retirement Association noted that while it “strongly supports a fiduciary standard,” it contends that the application of such a standard under state law “is very problematic for ERISA plans and their professional service providers.” The ARA argued that this “is due to the very real potential for conflicting standards between state law and those set forth in ERISA.”
With the proposal exempting advisors working with ERISA plans and participants, this was a big win for the NAPA Government Affairs Committee. NAPA lobbied hard with New Jersey state regulators on this, with a big assist from Greg Marsh of Bridgehaven Fiduciary Partners, Chair of the Government Affairs Committee, who has an office in New Jersey.