The COVID-19 outbreak has pushed back a potential final regulation that would raise the investment advice standard for brokers in New Jersey.
The state’s securities bureau released a proposal one year ago Wednesday that would impose a fiduciary duty on brokers, putting them under a stronger requirement than the current suitability standard that governs them.
Under New Jersey law, rule proposals expire after one year if a final rule is not promulgated. Although the New Jersey Securities Bureau has not released a final fiduciary rule, it was given more breathing room by Gov. Phil Murphy.
On Tuesday, Murphy issued an executive order extending the deadline for proposed rules issued on or after April 15, 2019, until 90 days after the state’s health emergency is lifted.
In a recent interview, Christopher Gerold, chief of the New Jersey Securities Bureau, declined to comment on the state’s fiduciary duty rule-making process.
New Jersey is one of three states – in addition to Massachusetts and Nevada–pursuing its own broker advice standard that is separate from the Securities and Exchange Commission’s Regulation Best Interest, which was approved last summer and must be implemented by June 30. Officials in the three states have said Reg BI, as it’s known, is not strong enough to protect investors.
The brokerage industry opposes state-level fiduciary rules, asserting that Reg BI, as its known, must be the national standard. If it’s not, the industry says financial firms will have to contend with a patchwork of advice regulations that will increase regulatory costs.
The delay of the New Jersey rule as a result of the disruptions caused by the coronavirus introduces new uncertainty to the state-level efforts.
“The question is: Is a final rule [in New Jersey] likely to see the light of day?” said George Michael Gerstein, counsel at Stradley Ronon Stevens & Young. “The answer to that is probably yes.”
Just as the SEC has forged ahead with Reg BI implementation despite the virus, Gerstein said states are likely also to “move forward sooner rather than later,” citing investor protection concerns.
The law that established fiduciary duty for brokers in Nevada was enacted in July 2017. Since then, the state’s securities division has been working on regulations that would clarify how the broker standard would work in practice and provide related exemptions. Draft regulations were released in January 2019.
The coronavirus outbreak has “put us behind by at least a month” in promulgating final fiduciary regulations, Erin Houston, Nevada securities administrator, wrote in an email.
Although fiduciary duty for brokers is on the books in Nevada, the industry is waiting on the final regulations to see compliance details.
“A regulation providing appropriate definitions and exemptions would be essential for assessing compliance requirements and risk,” Gerstein said.
Massachusetts is the state that is farthest along in establishing its own fiduciary regulation. Secretary of State William Galvin released a final rule in February. The coronavirus isn’t expected to affect the regulation because enforcement won’t start until September.
But even in Massachusetts, there may be more developments because the brokerage industry has hinted that it’s likely to file a lawsuit against the Massachusetts fiduciary regulations or those from other states.
Over the years, fiduciary legislation has percolated in state legislatures. Those efforts may swing back into action after the pandemic passes.