Dennis Cuccinelli, an independent financial representative based in Edison, N.J., and a member of the NAIFA Board of Trustees, testified yesterday at a public hearing before the New Jersey Bureau of Securities on the Bureau’s proposed regulation to establish a uniform fiduciary standard for financial professionals.
Cuccinelli testified on behalf of NAIFA’s New Jersey chapter and the national organization. He stated that “the proposal is not workable in its current form, and if adopted will be harmful to the very consumers the Bureau is trying to protect.”
NAIFA has always supported reasonable efforts to protect clients from unethical behavior and predatory financial practices. The association advocates in favor of consumer-protection laws. Recently, the group supported a New Jersey law that expanded the state Department of Banking and Insurance’s authority to discipline insurance and financial advisors and a federal law that makes it easier for financial professionals to report suspected cases of fraud.
The current proposal, Regulation N.J.A.C. 13:47A-6.4, however, would likely create unnecessary barriers between financial professionals and their clients, reduce consumer choices, and deny some lower- and middle-tier investors access to financial products, services, and guidance.
“The rule proposal favors a fee-based business model over a commission-based model,” Cuccinelli testified. “One result of this will be that if adopted, the proposal will likely lead to large numbers of broker-dealers and registered representatives changing their business practice to a fee-based model.”
Fee-based financial services are not the best option for all investors. Many fee-based practices, for instance, require minimum account balances of $250,000, $500,000 or more, which may be beyond the means of investors. Many who cannot meet these minimum balances would likely lose access to personalized investment services and guidance.
Some clients prefer paying commissions to paying fees and are better served by commission-based accounts. Under the New Jersey proposal, many would likely lose their ability to choose the form of compensation that benefits them.
While the proposal would establish a fiduciary duty for financial professionals to their clients, it only vaguely states what that duty would mean. It says those who recommend securities must only recommend the “best of reasonably available options.” Cuccinelli testified that the term “'best' is “so open-ended and subjective that any advisor could be found in violation, despite the fact that the advisor acted in the best interests of the client at the time of the recommendation or transaction.” What is best for one client may not be best for another; what is best today may not be best tomorrow. There may be multiple investment options that are equally appropriate without one standing out as being the “best.”
Finally, the Securities and Exchange Commission recently finalize its Regulation Best Interest (Reg BI) that increases consumer protections and requires financial professionals nationwide to act in their clients’ best interests. Reg BI, along with existing state and federal anti-fraud laws go a long way toward addressing concerns raised by the Bureau of Securities. It would be difficult for financial professionals to comply with a patchwork of state fiduciary regulations that would accomplish little beyond Reg BI. And should state measures contradict Reg BI, it would put them in “the impossible position of deciding to abide by state or federal regulations and rules,” Cuccinelli said.
