The New Jersey Legislature has pending bills which would require Non-Fiduciary Disclosures. Both bills were introduced in January 2018 (S. 735/A. 335) and have not yet progressed through the state Legislature. On the other hand, New York’s Department of Financial Services ("DFS") proposed Best Interests Standards for Life and Annuity Products in December 2017. DFS’ proposal was adopted in July, 2018. Both initiatives impact a broad scope of financial products, financial service providers and consumer segments, including the senior marketplace, and are discussed below.
New Jersey’s Non-Fiduciary Investment Professional Disclosure
New Jersey’s pending bills would require certain disclosures by non-fiduciary investment advisors regarding their fiduciary status with clients. Reintroduced in the 2018 legislative session on January 9 by State Senator Patrick Diegnan, Jr. (D-Middlesex), along with Assemblywoman Nancy Pinkin (D-Middlesex) and Assemblyman Nicholas Chiaravalloti (D-Hudson), the bills (S. 735/A. 335) would require non-fiduciary investment advisors to disclose to clients that they do not have a fiduciary relationship and “are not required to act in the client’s best interests.” Within the scope of the law, a non-fiduciary investment advisor would include “any individual or institution that advertises or uses in self-identification any term that is suggestive of investment, financial planning, or retirement planning knowledge or expertise. The definition includes, but is not limited to, broker/dealers, investment advisors, financial advisors, financial planners, financial consultants, retirement planners, retirement brokers, or retirement consultants. If adopted in their current forms, the proposals would impose a $5,000 fine for violations.
The New Jersey disclosures, referred to in the pending legislation as “plain language” disclosures, would need to be provided both orally and in writing and specifically at the outset of the professional relationship, stating:
I am not a fiduciary. Therefore, I am not required to act in your best interests, and am allowed to recommend investments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks, and expected returns for you.
Those subject to the legislation would be required to maintain a signed acknowledgement that the written disclosure had been provided to the client. In addition, the written disclosure must accompany any subsequent oral advice or written materials provided to clients, such as investment brochures and advertising materials.
Investment advisors subject to an existing state or federal fiduciary standard or by applicable standards of professional conduct would not be subject to the requirements. However, investment advisors who are subject to a fiduciary duty with respect to certain types of investment advice, but not to others, would be required to disclose the extent of that duty to individual investors.
The proposed legislation has not yet been adopted, although those closely monitoring the bills expect adoption. However, as the legislation has not yet been adopted, on September 17, which marked the 10th anniversary of the 2008 global financial crisis, New Jersey Governor Phil Murphy announced plans to issue “a rule strengthening the standards for investment professionals in New Jersey to better protect residents seeking to invest their life savings and to close a regulatory gap in federal oversight that helped fuel the economic meltdown a decade ago.” https://www.nj.gov/governor/news/news/562018/approved/20180917c.shtml The rulemaking, being initiated by the New Jersey Bureau of Securities, would impose a fiduciary duty on all New Jersey investment professionals, requiring them to place their clients’ interests above their own when recommending investments.
New York’s Best Interest Standard for Life and Annuity Products
Meanwhile, the New York Department of Financial Services on December 27, 2017, proposed new regulations that would adopt a “best interest” standard for sellers of life insurance and annuity products. Those Regulations were adopted by DFS in July, 2018. As explained in https://www.bressler.com/new-york-dfs-proposes-amendments-to-its-annuity-suitability-rule, the Regulations address several issues for insurance producers, life insurers and annuity issuers, and establish a New York-specific standard for insurance licensee conduct by expanding the scope and requirements of New York’s suitability regulation. https://www.dfs.ny.gov/insurance/r_finala/2018/rf187a1txt.pdf
The New York Regulations address the duties and obligations of insurers, including fraternal benefit societies, by requiring them to establish standards and procedures for recommendations to consumers with respect to annuity contracts and insurance policies delivered or issued for delivery in New York State so that any transaction with respect to those contracts and policies is (i) in the best interest of the consumer and (ii) appropriately addresses the insurance needs and financial objectives of the consumer at the time of the transaction.
New York’s standards and procedures are substantially similar to the National Association of Insurance Commissioners’ Suitability in Annuity Transactions Model Regulation (“NAIC Model”) for annuities, and the Financial Industry Regulatory Authority’s current National Association of Securities Dealers (“NASD”) Rule 2310 for securities. To date, more than 30 states have implemented the NAIC Model, while NASD Rule 2310 has applied nationwide for nearly 20 years. The Regulations expressly intend to bring these national standards for annuity contract sales to New York State.
The New York Regulations also clearly describe the nature and extent of supervisory controls that an insurer must maintain to achieve compliance. The Regulations further identify the duties and obligations of producers when making recommendations to consumers with respect to policies delivered or issued for delivery in New York State to ensure that a transaction is in the best interest of the consumer and appropriately addresses the insurance needs and financial objectives of the consumer at the time of the transaction.
The pending legislation in New Jersey and the recently adopted New York Regulations signal aggressive state action to protect consumers even in the face of recent federal rules.