United States: SIFMA Urges New Jersey To Pause Before Enacting "State-Specific" Reg. BI Standard

Last Updated: July 26 2019
Article by Steven D. Lofchie

Most Read Contributor in United States, July 2019

In testimony before the New Jersey Bureau of Securities (the "Bureau,") SIFMA Managing Director and Associate General Counsel Kevin Carroll urged the Bureau to wait for Regulation Best Interest ("Reg. BI") to be fully implemented before enacting a New Jersey proposal (the "Proposal") that would impose state-specific fiduciary duties on broker-dealers.

Reg. BI, as previously covered, is part of a rulemaking package designed to enhance retail investors' protections when dealing with broker-dealers and investment advisers. Specifically, Reg. BI will require broker-dealers not to prioritize their interests ahead of customers' when making recommendations regarding a securities transaction, investment strategy or account recommendation.

The Proposal, as previously covered, would enforce a uniform fiduciary standard for broker-dealers and investment advisers doing business with New Jersey residents. Under the proposal, broker-dealers and investment advisers 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."

Mr. Carroll argued that Reg. BI would better protect investors and avoid confusion, as compared to a state-by-state approach. He cited two New Jersey Proposal requirements, in particular, that were problematic. He said that:

  • broker-dealers being required to continuously monitor customers' brokerage accounts will essentially eliminate brokerage accounts, as well as obscure access to investment advice for many New Jersey retail investors; and

  • the "best of" standard is essentially impossible to satisfy, and that it is "dubious" that the standard is stronger, or more protective of investors, than the "best of" standard under Reg. BI.

Mr. Carroll advised the Bureau to give Reg. BI a "chance," and to see how it protects New Jersey investors.

Commentary / Steven Lofchie

The New Jersey proposal (i) treats businesses as inherently bad for seeking to earn a profit on their operations, and (ii) imagines that punitive regulations can be imposed on businesses without harming the consumers that use the services those businesses provide.

Let's "translate" the New Jersey proposal into practice. Under it, a broker-dealer providing a single bit of investment advice must now monitor the client's account on a continuing basis. Suppose that the client would be required to pay an investment adviser $5,000 to monitor the client's account for a year. Suppose also that the client engages a broker to effect a securities trade for the client as to which the broker earns $500 and, in the course of effecting that transaction, gives the client some advice. As a result of doing $500 worth of business, the broker-dealer is on the hook to provide the client with account monitoring worth $5,000 a year. Any broker dumb enough to engage in that business would soon be out of business. Any broker not so dumb will no longer give clients any investment advice.

The New Jersey proposal is not a bit of regulation that needs to be fixed. Regulators need to come to terms with this simple reality: bad rules imposed on businesses hurt consumers. If the government requires firms that provide a particular service to do so in a manner that is inherently unprofitable, businesses will stop offering that service. See also SEC Chair Jay Clayton Responds to Criticism of Reg. Best Interest.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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