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New Jersey Bureau of Securities Proposes Uniform Fiduciary Standard

Steven.Lofchie@cwt.com's picture
Commentary by Steven Lofchie

The New Jersey Bureau of Securities (the "Bureau") proposed a uniform fiduciary standard for broker-dealers and investment advisers doing business with New Jersey residents. Under the proposal, a firm would be obligated to satisfy both a duty of loyalty and a duty of care. Failure to comply with the fiduciary standard would constitute a "dishonest or unethical practice."

The proposal would apply to a very broad range of transactions and activities, including "the opening of, or transfer of, assets to any type of account."

To satisfy the duty of care, a broker-dealer would be required to 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."

Any firm that is dually registered as a broker-dealer and investment adviser would be subject to a fiduciary duty to its customers even where it is not acting as an adviser.

The Bureau notes that a firm cannot presume that the disclosure of a conflict of interest will satisfy its duty of loyalty to the client. Further, transaction-based fees would be allowed in certain circumstances, provided that the "fee is reasonable" and is the "best of the reasonably available fee options for the customer."

Comments on the proposal must be submitted to the Bureau by June 14, 2019.

Commentary

The New Jersey rule would establish a standard of conduct that is largely open-ended. Firms will have an extremely difficult time, if not an impossible time, establishing and demonstrating compliance.

Further, it does not seem possible that a broker-dealer could cost-justify obtaining the necessary information in regard to a customer's financial and personal situation while charging only a transaction fee. As a result, investors will be required either to make investment decisions wholly independently or pay advisory fees. This may be a good result, but it is far from obvious that that is the case.

More broadly, the proposed rule reflects a continuing trend by financial regulators toward destroying the historic business model under which so-called "full service broker-dealers" give incidental investment advice to clients and provide execution services for the cost of executing securities transactions.

Unfortunately, the proposed rulemaking reflects a mistaken regulatory belief that obligations imposed on businesses do not result in any costs imposed on consumers. See generally "Choose One: Best Interest or Full Service."

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