ADISA Meets with New Jersey State Regulators to Discuss Proposed Fiduciary Rule and Alternative Investments

Sep 18, 2019

ADISA’s government relations team met with regulators in New Jersey earlier this week to discuss the state’s impending fiduciary rule. ADISA board member and former president, John Grady (Practus), along with Thomas Rosenfield (HillStaffer), attended the meeting.

“This was a productive meeting that we were very pleased to be invited to by New Jersey regulators, and we discussed a variety of technical and procedural issues that relate to the state’s proposed fiduciary rule,” said Grady. “Among the discussions were the nuances of alternative securities compared to other securities, the importance of ‘costs’ and the meaning of ‘best interest’ under New Jersey’s proposed rule, as well as the rule’s potential implementation and effective dates.”

Key Takeaways
Several key points came out of the 90-minute discussion with Paul Rodriguez, acting director of the New Jersey Division of Consumer Affairs, plus five other senior staff members of the New Jersey Bureau of Securities and two members of the New Jersey Attorney General’s office. These include:

  1. Protecting the investor — the ultimate consumer of financial services — remains the Division’s primary focus, with an emphasis on addressing the potential for investor confusion about the differences between advisers and broker.
  2. The Division is considering the priority that should be given to “cost,” relative to other factors, when brokers and advisers are considering whether to recommend a security or strategy.
  3. The proposed regulation’s use of the word “best” is intended, in theory, to be about process and not an absolute requirement to be applied in hindsight.
  4. A broker’s duty to his or her client can be “episodic” in nature, with the proviso that the limited time frame makes monitoring and other post-transaction requirements more important.
It appears that New Jersey’s regulators involved in the rule-making process recognize the “episodic” nature of the duty that would be imposed under the proposed regulation on brokers and advisers alike, and also understand that the sales process for alternative investments varies quite substantially from other securities vis-à-vis clients and their expectations. However, it seems likely they remain concerned with financial professionals who wear both representative investment advisory hats and also with how to regulate their behavior to try and minimize “bad” (or even just confusing or misleading) actors.

Next Steps
A fiduciary rule clearly is forthcoming from the state. The state has one year from April 15, 2019 to promulgate a final rule without triggering additional hearings. Any implementation date would typically be 90-180 days thereafter. Presuming no litigation or other procedural delays, we see a final rule sometime in Q4 2019 or Q1 2020, with an implementation date sometime after the SEC’s June 2020 Regulation Best Interest implementation date.

ADISA and its coalition members will continue to push for sensible regulations that not only foster the state’s desire to protect consumers, but also protect the legitimate interests of alternative investments and the firms and individuals that recommend them to their clients, as well as numerous retail investors who include alternatives as crucial aspects of their retirement and savings portfolios.

The concept of an episodic or limited duty remains a crucial aspect of any workable fiduciary rule. We will continue to fight for its inclusion, as well as meaningful definitions of “best” and “cost” as we did in our comment letter issued earlier this year.