Inexperienced and unsophisticated investors are particularly susceptible to predatory tactics, but the Murphy administration has abandoned a 2019 rule proposal that would have imposed a uniform fiduciary duty on securities broker-dealers and investment advisers.
The 2019 proposal is set to expire on January 1, 2022, absent further action by the state Bureau of Securities. The duty requires that brokers and advisers act solely in the interest of their clients, rather than in their own interest.
“Prior to finalizing a Fiduciary Rule, the bureau intends to reassess the rapidly changing landscape of the financial industry and determine whether further modernization of the Bureau’s rules is necessary,” said Christopher W. Gerold, chief of the New Jersey Bureau of Securities.
Gerold said that since the bureau published its rule proposal in 2019, the securities industry has seen a dramatic rise in the use of digital platforms and digital engagement practices by broker-dealers and investment advisers.
COVID-19 accelerated this trend, as millions of investors turned to trading applications and social media for investment advice.
The financial industry’s use of digital engagement practices, including digital marketing, has drawn new investors into the market, many of whom have little or no prior investment experience.
These unsophisticated investors may be particularly susceptible to predatory tactics, including the use of gaming features—for example, point-scoring and competition with other investors—to increase trading activity, a practice known as “gamification.”
In light of the rise of these new market trends, the Investor Advocate at the Securities and Exchange Commission (SEC) has questioned whether investor protection standards should turn on whether a broker-dealer makes a specific recommendation – as parts of the bureau’s 2019 proposal do.
The SEC is currently evaluating how to respond to these new risks to investors.
In August 2021, the SEC sought information from the public regarding retail investors’ experiences with digital investing platforms.
In addition, since the bureau’s proposal, the SEC has finalized its Regulation Best Interest and issued related guidance addressing the standard of conduct for broker-dealers and related persons nationwide.
Meanwhile, the U.S. Department of Labor has issued its own guidance and is expected in the near future to propose rulemaking to amend the regulatory definition of the term “fiduciary” to more appropriately define when persons who render investment advice for a fee to employee benefit plans and individual retirement accounts are fiduciaries within the meaning of federal law.
That proposal is expected to take into account practices of investment advisers, and the expectations of plan officials and participants, and individual retirement account owners who receive investment advice, as well as developments in the investment marketplace, including in the ways advisers are compensated that can subject advisers to harmful conflicts of interest.
The bureau plans to explore ways to address these emerging trends in the securities industry rather than finalize a rulemaking that was proposed prior to recent developments in industry practices.
Under New Jersey’s Administrative Procedure Act, a future rulemaking on the topic typically would be initiated through a new proposal. In the meantime, the bureau claims it will not hesitate to use its existing regulations and enforcement authority to prevent and otherwise remedy predatory conduct toward retail investors.
The Bureau of Securities is an agency within the Division of Consumer Affairs, which is a component of the Department of Law and Public Safety, all of which are designed to protect the public from fraud, deceit, misrepresentation, and professional misconduct in the sale of goods and services in New Jersey through education, advocacy, regulation, and enforcement.