This morning we attended the first public hearing held by the NJBOS concerning its pre-proposal to adopt a rule implementing a uniform fiduciary standard for investment professionals, including broker-dealers and investment advisers. The hearing was administered by New Jersey officials, including Christopher Gerold, Chief of the NJBOS. There were approximately 40 attendees from diverse backgrounds – investment firms, industry groups, in-house and outside counsel, and consultants. Here are three takeaways from the hearing:
- No indication exists that the NJBOS will not adopt a Rule. In fact, Chief Gerold indicated the aim is to implement a “sound, sensible rule” after hearing from all stakeholders. The tentative schedule is as follows: (i) a second public hearing on November 19, 2018, (ii) initial comment period ends on December 14, 2018, and (iii) notice of a proposed rule will be published either late winter or early spring 2019, followed by another comment period. There was no intent expressed to adopt a Rule either before or after the SEC’s Regulation Best Interest (“RBI”) is adopted.
- No consensus from the speakers. There were seven speakers who made formal remarks at the hearing, and they were equally divided between support and opposition for the Rule. For example, whereas on the one hand the Consumer Federation of America was clearly pro-Rule, on the other hand SIFMA and the Financial Services Institute were opposed to the Rule. The American Retirement Association was opposed to the Rule insomuch as it applied to accounts covered by ERISA. There was clearly disagreement on (i) whether the New Jersey Rule is even needed given the pending RBI, (ii) whether the New Jersey Rule would bring clarity to the investing public or cause more confusion because it creates additional, different standards of care than the soon-to-be-adopted federal standard, and (iii) whether the New Jersey Rule would be preempted by federal rules.
- Practical considerations. Regardless of which duty is adopted, Rick Barry, the former Enforcement Chief at the NJBOS, offered some really practical, insightful thoughts about the coming challenges faced by all investment professionals and why a higher standard of care may be needed. Rick identified five concerns:
i. Investment professionals do not understand the complex products offered today;
ii. Customers face an ever-expanding list of product offerings;
iii. There is a growing investment professional population that has never experienced a down market and will not know how to deal with one;
iv. Seniors will be hard hit by a market downturn because of their need to dabble in the more exotic products to obtain yield; and
v. Market volatility has dramatically increased.