Scarinci Hollenbeck, LLC
The Firm
201-896-4100 info@sh-law.comFirm Insights
Author: Scarinci Hollenbeck, LLC
Date: May 8, 2019
The Firm
201-896-4100 info@sh-law.comNew Jersey is poised to become the first state in the country to enact a uniform fiduciary standard for all financial advisors, including both investment advisors and broker-dealers. The new rule proposal, N.J.A.C. 13:47A-6.4, is now open for public comment.
According to the Bureau of Securities (Bureau) within the Division of Consumer Affairs, “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 Bureau further maintains that “the proposed new rule will establish a uniform standard for financial professionals and rectify investor confusion that results from the lack of uniformity.”
Investment advisors (Series 65/66 license) owe their customers a fiduciary duty, which includes duties of loyalty and care. Broker-dealers (Series 7) are subject to a less-stringent ‘suitability standard’, which requires having reasonable grounds to believe that the strategy, transaction, or recommendation is suitable for the customer, based upon reasonable inquiry concerning the customers’ investment objectives, financial situation, and needs, and any other relevant information known by the broker-dealer.
Since the 2008 financial crisis, there were increasing calls for a uniform investment advice rule that applies to both investment advisors and broker-dealers. However, there was little agreement on the best path forward to a unitary standard. The Department of Labor (DOL) finalized its fiduciary rule in 2016, which redefined who is a “fiduciary” under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (Code). After a series of implementation delays, the U.S. Fifth Circuit Court of Appeals officially vacated the rule as of June 21, 2018.
The Securities and Exchange Commission (SEC) also proposed its own Regulation Best Interest (“Regulation BI”). Under the SEC proposed rule, which was slow to advance through the regulatory approval process, a broker-dealer making a recommendation to a retail customer would have a duty to act in the ‘best interest’ of the retail customer at the time the recommendation is made, without putting the financial or other interests of the broker-dealer ahead of the retail customer.
Notably, New Jersey’s proposed fiduciary standard would be more stringent than the SEC’s Regulation BI. As several commenters to the NJ proposal noted, the SEC Regulation BI standard is greater than that of the suitability rule but less than that of a fiduciary duty, the Bureau stated in its rule summary. “The Bureau believes that the SEC Regulation BI does not provide sufficient protections for New Jersey investors.”
New Jersey’s proposed fiduciary rule requires all registered financial services professionals to act in accordance with the fiduciary duty to their customers when providing investment advice or recommending to a customer an investment strategy, the opening of or transfer of assets to any type of account, or the purchase, sale, or exchange of any security. Conduct falling short of this fiduciary duty would constitute a “dishonest and unethical practice.”
As outlined by the Bureau, below are several other key provisions of N.J.A.C. 13:47A-6.4:
New Jersey’s proposed rule is now subject to a 60-day public comment period during which stakeholders will have an opportunity to submit written comment on the proposed rule. The deadline is June 14, 2019. A summary of the public comments and the Bureau’s response to them will be published in a Notice of Adoption expected sometime in the fall. Upon publication of the Notice of Adoption, the rule becomes final and will take effect in 90 days.
If enacted, New Jersey’s uniform fiduciary standard is likely to face legal challenges by the financial industry. Critics contend that the state has exceeded its authority and must wait for the SEC to act. The SEC’s final rule is expected late summer/early fall, although the agency has not publicly committed to a specific timeline.
If you have any questions or if you would like to discuss the matter further, please contact me, Paul Lieberman, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Ongoing economic uncertainty is forcing many companies to make tough decisions, which includes lowering staff levels. The legal landscape on both the state and federal level also continues to evolve, especially with significant changes to the priorities of the Equal Employment Opportunity Commission (“EEOC”) under the Trump Administration. Terminating an employee is one of the […]
Author: Angela A. Turiano
While filing annual reports may seem like a nuisance, failing to do so can have significant ramifications. These include fines, reputational harm, and interruption of your business operations. In basic terms, “admin dissolution for annual report” means that a company is dissolved by the government. This happens because it failed to submit its annual report […]
Author: Dan Brecher
Antitrust laws are designed to ensure that businesses compete fairly. There are three federal antitrust laws that businesses must navigate. These include the Sherman Act, the Federal Trade Commission Act, and the Clayton Act. States also have their own antitrust regimes. These may vary from federal regulations. Understanding antitrust litigation helps businesses navigate these complex […]
Author: Robert E. Levy
If you’re considering closing your business, it’s crucial to understand that simply shutting your doors does not end your legal obligations. Unless you formally dissolve your business, it continues to exist in the eyes of the law—leaving you exposed to ongoing liabilities such as taxes, compliance violations, and potential lawsuits. Dissolving a business can seem […]
Author: Christopher D. Warren
Contrary to what many people think, corporate restructuring isn’t all doom and gloom. Revamping a company’s organizational structure, corporate hierarchy, or operations procedures can help keep your business competitive. This is particularly true during challenging times. Corporate restructuring plays a critical role in modern business strategy. It helps companies adapt quickly to market changes. Following […]
Author: Dan Brecher
Cryptocurrency intimidates most people. The reason is straightforward. People fear what they do not understand. When confusion sets in, the common reaction is either to ignore the subject entirely or to mistrust it. For years, that is exactly how most of the public and even many in law enforcement treated cryptocurrency. However, such apprehension changed […]
Author: Bryce S. Robins
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!