‘No Consensus’ on NJ Proposed Uniform Fiduciary Standard

The New Jersey Bureau of Securities held a public hearing Nov. 19 on the proposed state rule that would implement a uniform fiduciary standard in the Garden State. It is the second public hearing on the proposal; American Retirement Association General Counsel Craig Hoffman offered testimony at the first hearing, which was held on Nov. 2.

The bureau is proposing that it amend its rules to require that broker-dealers, agents, investment advisers and investment adviser representatives be subject to a fiduciary duty. Specifically, it is considering “making it a dishonest or unethical business practice for failing to act in accordance with a fiduciary duty when recommending to a customer, an investment strategy, or the purchase, sale, or exchange of any security or securities, or providing investment advisory services to a customer.” The bureau believes that a uniform standard would protect investors from abuses it argues can result if financial professionals place their own interests above those of their customers.

Gov. Phil Murphy (D) announced plans in September to issue a rule strengthening the standard for investment professionals in the Garden State. The ARA submitted a comment letter to New Jersey Bureau of Securities Bureau Chief Christopher Geroldon the proposal on Oct. 19. While the ARA said that it believes that investors “are best served when the interests of the financial services professional and investors are aligned” and that it“strongly supports a fiduciary standard,” it also said that the application of such a standard under state law “is very problematic for ERISA plans and their professional service providers.” It further recommended that the bureau exclude fiduciary services provided to ERISA plans (and fiduciary services provided to the participants and beneficiaries in such plans) from application of the proposed fiduciary standard.

Hearing Testimony

In his Nov. 2 testimony, ARA General Counsel Craig Hoffman said that the ARA “believes that any attempt to apply the potential amendment to the rules to ERISA plans and their participants would be enjoined by a federal court as a result of ERISA preemption.” He continued, “For this reason, ARA recommends that the New Jersey Bureau of Securities, in exercising its regulatory authority, affirmatively exclude fiduciary services provided to ERISA plans (and fiduciary services provided to the participants and beneficiaries of such plans) from application of the proposed fiduciary standard in recognition of ERISA pre-emption under ERISA §514 and the existing enforcement mechanisms already provided by ERISA §502(a).”

No Consensus

On its Financial Services Litigation Report blog, the ReedSmith law firm reports that speakers at the Nov. 19 hearing included “traditional industry groups,” as well as the AARP, Consumer Reports and the U.S. Chamber of Commerce, and firms such as Cetera, Fidelity Investments and Primerica. They further report that there was “no consensus from the speakers” on support for, or criticism of, the proposed rule.

ReedSmith notes that a new argument was raised at the Nov. 19 hearing: that the proposed rule could create “the inadvertent consequence of limiting or eliminating access to commission-based models for lower- to mid-tier customers.”

Comments Still Welcome

The bureau is accepting public comments on the proposed rule through Dec. 14. It seeks comments on:

  • the legal and factual bases for applying a fiduciary standard to all financial services professionals;
  • the scope of the fiduciary duty regarding duration and when it arises;
  • the types of recommendations that would trigger the duty; and
  • the scope of the duty regarding to whom it is owed.

The bureau expects to publish a proposed rule before the end of the first quarter of 2019 followed by additional opportunity for public comment, according to ReedSmith.

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