Newark, New Jersey.
Representatives of the brokerage industry were out in full force at Wednesday's public hearing on New Jersey's proposed fiduciary rule for BDs, opposing the rule. Two-thirds of the 30 public speakers at the all-day hearing in Newark, New Jersey, represented BDs or insurance companies; only one-third represented individual investors and favored the proposal.
The all-day hearing was largely a referendum of the Securities and Exchange Commission's new Regulation Best Interest. Industry representatives like Kevin Carroll, associate general counsel of the Securities Industry and Financial Markets Association, argued that Reg BI precludes the need for additional regulation of BDs because the new SEC rule already "raises the bar from the existing FINRA suitability standards," with its duty of care (advice in the client's best interest) and duty of loyalty (putting the client's interests before the advisor's), full and fair disclosure obligation and policies and procedure requirements to disclose and mitigate conflicts.
Investor advocates such as Micah Hauptman, financial services counsel at the Consumer Federation of America, said Reg BI is not much different from the Financial Industry Regulatory Authority's suitability rule and will mislead investors "into trusting their brokers are providing higher quality advance than they're legally required to provide," leaving gaps that the New Jersey fiduciary rule tries to fill.
According to Hauptman and other consumer advocates like Knut Rostad, of the Institute for The Fiduciary Standard, Reg BI has many gaps that are addressed by the New Jersey fiduciary rule: Reg BI doesn't define best interest ("so BDs will," said Rostad); doesn't require the avoidance of conflicts of interest, only disclosure; and allows "hat-switching" by dually registered brokers who also provide investment advice which will "perpetuate investor confusion and harm," said Hauptman.
"Give Reg BI a fair chance," said Carroll. "Now is not the time to layer on state-specific fiduciary requirements that would add no additional investor protection value but that would be costly to implement, and that limit New Jersey investors' choice of and access to products, services and advice."
Industry opposition to the New Jersey fiduciary rule centered on several key issues:
Best of: the rule requires that brokers use "best of the reasonably available options" when recommending account openings, transferring assets or the purchase, sale or exchange of a specific security and charge a transaction-based fee that is "the best of the reasonably available fee options for the customer."
"Best is not a fiduciary concept…. It is also a practical impossibility in the real world," said Bradford Campbell, representing the U.S. Chamber of Commerce, Center for Capital Markets Competitiveness.
Ongoing fiduciary duty obligation of dually registered brokers who provide a client investment advice as well as episodic brokerage services for the "entire relationship."
Carroll said, according to SEC interpretive guidance, this is inconsistent with the "solely incidental" clause of the broker-dealer exclusion from the definition of an investment adviser subject to the Investment Advisers Act of 1940, and with continuous monitoring the broker would be subject to all the requirements of that law.
