Thursday, January 6, 2022

New Jersey Reevaluating Fiduciary Rulemaking

The New Jersey Bureau of Securities recently announced that it would let its state fiduciary rulemaking expire.  In its release, it indicated that it intended to shift focus to gamified digital brokerage practices:

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. Meanwhile, the Bureau has been monitoring federal regulatory developments.

“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. 

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.”

Undoubtedly New Jersey has limited resources and must pick between approaches.   Still, New Jersey abandoning the field here will likely be seen as a major victory for brokerage houses.  New Jersey's proposed rule had more teeth than the SEC's Regulation Best Interest.  It would have required advice without regard to the broker's interest and also eliminated a presumption that disclosing a conflict satisfied the duty of loyalty.

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