Attorney General Gurbir S. Grewal and the Bureau of Securities announced Monday the proposal of a new uniform fiduciary standard for investment firms to protect investors and eliminate the confusion associated with financial advisers who wear dual hats as brokers.
The proposed rule, N.J.A.C. 13:47A-6.4, would require all investment professionals registered with the Division of Consumer Affairs’ Bureau of Securities to place customers’ interests above their own when recommending securities or providing investment advice, according to Grewal.
If adopted, New Jersey would be among the first states to establish such a standard, according to Gov. Phil Murphy, who praised the proposed rule as a safeguard against “predatory financial practices.”
“Today, we are strengthening the integrity of New Jersey’s financial services industry by proposing some of the strongest investor protections in the nation,” the governor said in a statement.
The proposal arises largely from the consumer/advocate movement following the 2008 financial crisis, when major banks faltered or went under, leaving thousands of investors with little recourse to recoup their losses.
The proposed rule, published on Monday in the New Jersey Register, requires all registered financial service professionals to act in accordance with a fiduciary duty to their customers when providing investment advice, recommending investment strategy, opening or transferring their assets to any type of account, or making 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.”
“If the federal government won’t act to protect investors, then we will,” Grewal said in a statement. “Today, we are fulfilling Governor Murphy’s promise to strengthen financial protections for New Jersey residents.”
Grewal, who at a recent hearing before the Senate Budget Committee proposed his department’s $45.5 million fiscal 2020 budget, said among his top priorities are to take on Trump administration policies that he sees as violative of state residents’ rights.
Grewal said under current federal standards, only investment advisers and their representatives have a fiduciary duty to put their clients’ interests above their own. But broker-dealers and their agents, who provide similar financial services, are subject to a less stringent duty: to provide recommendations that are “suitable” for their clients.
Critics of that standard say it leaves investors vulnerable to conflicts of interest and excessive fees since many broker-dealer agents are also investment adviser representatives.
Dual registrants can “switch hats” when dealing with the same customers, thereby blurring the lines between investment advisory services and sales services, according to Paul R. Rodriguez, acting director of the Division of Consumer Affairs.
“Investors should be able to trust that they are not receiving conflicted advice when investing their hard-earned savings,” Rodriguez said in a statement. “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.”
There is a 60-day public comment period during which stakeholders have an opportunity to submit written comment on the proposed rule, after which the bureau will review the comments and publish a summary of the comments with responses in a notice of adoption expected for the fall, the announcement said.
If adopted, N.J.A.C. 13:47A-6.4 would provide:
- It is dishonest or unethical 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 pertaining to one’s investment/asset/security portfolio.
- Both the duty of care and duty of loyalty are imposed on brokers.
- The broker-dealer, agent, or adviser must make reasonable inquiry, including risks, costs, and conflicts of interest, related to a recommendation or investment advice that will be in the best interest of the customer.
- Any recommendation or advice provided to a customer must be made without regard to the financial or any other interest of the broker-dealer, agent, adviser, or any other affiliation.
- When a broker-dealer or its agent makes a recommendation, the fiduciary duty obligation extends through the execution of the recommendation and shall be deemed an ongoing obligation.
- Transaction-based fees are allowed in certain circumstances provided they are reasonable and the best option for the customer.
- The fiduciary duty obligation shall be applicable throughout the entire relationship with the customer on an ongoing basis even if the agent wears “dual hats” as both broker-dealer and investment adviser.
- Harmful incentives, such as sales contests that encourage and reward conflicted advice, can be presumed to be invalid.
“We believe we have crafted a sound, sensible rule that not only fulfills our duty to safeguard investors, but also protects the integrity of the financial markets,” said Christopher Gerold, chief of the New Jersey Bureau of Securities.