Well, We Are Persistent. Comment Period Ended Mid-July on NJ Fiduciary Proposal. Comments Are Not Posted Online but We’ve Pieced Together an Analysis
Posted on Categories Professional Conduct, Regulation, Rulemaking, StateTags , , , ,

By George H. Friedman, SAA Editor-in-Chief

The comment period closed July 18 on New Jersey’s proposed fiduciary rule, with somewhat predictable comments. Although the comments are not routinely posted online (ed: really, New Jersey?), with some sleuthing and help from the AG’s Consumer Affairs folks, we’ve been able to put together an analysis.

As reported in SAA 2019-15 (Apr. 17), the New Jersey Bureau of Securities on April 15th published 51 N.J.R. 493(a), seeking public comments on Fiduciary Duty of Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives. As described in a Summary: “In order to better protect the public interest and, in particular, New Jersey’s investing public, the New Jersey Bureau of Securities (Bureau) is proposing new N.J.A.C. 13:47A-6.4 to establish, by regulation, the common law fiduciary duty and apply it to broker-dealers and agents, and to codify it for investment advisers and investment adviser representatives. The Bureau believes that the proposed new rule is necessary to ensure that persons involved in the securities markets are uniformly held to a high standard in their dealings with the general public and is necessary to ensure the welfare of New Jersey investors.” The comment period was to have expired on June 14, but the Bureau later published a Notice extending the deadline to July 18 (see SAA 2019-24 (Jun. 19)).

Comments Hard to Find, but as Expected

The comments period closed July 18th, with over 1,000 letters. We searched in vain for the official compilation of comments, but could not find them. This was confirmed to us by the Attorney General’s Division of Consumer Affairs, which informed us that comment letters are not posted online but are available upon request after the comment period closes.  We thus got our hands on the 1,000+ comments supplied by Consumer Affairs. We also found some institutional comments online which we link to below. As expected, consumer and investor groups by and large support the proposed reg as filling gaps in the SEC’s Reg BI, and industry groups oppose the proposal as duplicative and costly. We analyze below some representative comment letters.

Consumer and Investor Advocates: Several investor and consumer rights groups sent a letter strongly supporting the proposed changes: “Several aspects of the Bureau’s proposal are vastly more protective of investors than corresponding provisions in Regulation Best Interest. These include the provisions in the proposal that would apply a uniform fiduciary standard across an appropriately broad range of advisory activities. They also include the specific formulation of the fiduciary standard, which would ensure that brokers’ and adviser’s advisory activities alike are not tainted by conflicts of interest, to investors’ detriment.” AARP organized submission of several hundred supportive comments submitted by individual investors. PIABA (the Public Investors Advocate Bar Association, f/k/a the Public Investors Arbitration Bar Association; see coverage of the name change elsewhere in this Alert) submitted a separate letter supporting the proposed Reg, as did NASAA.

Industry: SIFMA and several other industry groups submitted a joint comment letter opposing the proposed amendment. The writers’ core recommendation? “[W]e urge the Bureau to pause its rulemaking process, review Reg BI, and reevaluate its Proposal before deciding whether it is necessary to proceed with an additional state regulation. Doing so would give the Bureau an opportunity to determine if there are material gaps between Reg BI and the Bureau’s proposed regulation. This is especially critical, as the creation of overlapping, duplicative or potentially conflicting requirements could create serious issues for the industry – particularly if such rules go into effect across multiple states, which would likely lead to increased investor confusion and undermine the intent of federal law.” SIFMA submitted its own comment letter along the same lines.

(ed: *Next will be promulgation of a final rule. **Every time we’ve reported on State efforts to move ahead with their own fiduciary rules or laws, we’ve queried the potential preemptive effect of the SEC’s eventual rule. Reg BI addresses this issue directly: “We note that the preemptive effect of Regulation Best Interest on any state law governing the relationship between regulated entities and their customers would be determined in future judicial proceedings based on the specific language and effect of that state law. We believe that Regulation Best Interest, Form CRS, and the related rules, interpretations and guidance that the Commission is concurrently issuing will serve as focal points for promoting clarity, establishing greater consistency in the level of retail customer protections provided, and easing compliance across the regulatory landscape and the spectrum of investment professionals and products.” A footnote observes that “the preemptive effect on any state law would be determined in future judicial proceedings, and would depend on the language and operation of the particular state law at issue.” On the other hand, the introduction seems to recognize that the States have some room to maneuver: “We emphasize that Regulation Best Interest is separate from any common law analysis of whether a broker-dealer has fiduciary duties.”) (SAC Ref. No. 2019-31-02)

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