New Nevada law imposes fiduciary duty on brokers

The measure, effective July 1, requires advisers to disclose any "profit or commission" they receive and make a "diligent inquiry" about a client's financial condition and goals

Jun 16, 2017 @ 2:13 pm

By Mark Schoeff Jr.

+ Zoom

Brokers in Nevada will have to meet a fiduciary standard when providing investment advice under a law that will take effect July 1.

The measure revises a current fiduciary law applying to "financial planners" that excluded brokers and investment advisers. The new law subjects brokers and advisers to the state's fiduciary rule.

Brokers normally operate under a suitability standard enforced by the Financial Industry Regulatory Authority Inc. that requires them to sell products that fit a client's risk tolerance, liquidity needs and investment objectives. Under the Investment Advisers Act of 1940, investment advisers must give advice that is in a client's best interests, or meet a fiduciary standard.

The Nevada law will go on the books just weeks after partial implementation of a Labor Department fiduciary rule that requires all financial advisers to act in the best interests of their clients in retirement accounts. The DOL rule is undergoing a review mandated by President Donald J. Trump that could result in modification or repeal.

"For a state to impose fiduciary duty on all accounts, not just retirement accounts, is a very big deal," said Andrew Hartnett, officer at Greensfelder, Hemker & Gale and former Missouri securities commissioner. "As uncertainty [about the DOL rule] lingers out there, it wouldn't surprise me to see other states step into that void."

The Nevada law was approved on party-line votes in the Nevada legislature, where Democrats hold the majority. It was signed on June 5 by Gov. Brian Sandoval, a Republican. A spokeswoman for Mr. Sandoval did not respond to a request for comment.

Under Nevada's fiduciary duty, financial advisers must disclose any "profit or commission" they receive based on their guidance to clients and must make a "diligent inquiry" about a client's financial condition and goals, according to an analysis by Mr. Hartnett.

The new Nevada law authorizes the state's securities administrator, Diana J. Foley, to "adopt regulations defining or excluding acts, practices or courses of business as violations of that fiduciary duty." A spokesperson for Ms. Foley was not immediately available for comment.

It's not clear whether the Nevada law subjects brokers to a continuing duty of care or simply makes them fiduciaries at the point of sale, Mr. Hartnett said.

"There are a lot of questions surrounding what this legislation means for a commission relationship," he said.

The Nevada law could be challenged under federal pre-emption, according to George Michael Gerstein, counsel at Stradley Ronon Stevens & Young.

"There's a little bit of a question as to whether a state could force broker-dealers to register [as a fiduciary] when they don't have to do so at the federal level," Mr. Gerstein said.

In a 2012 study in the Journal of Financial Planning, Michael Finke, professor of personal financial planning at Texas Tech University, said courts in four states have recognized a fiduciary relationship between brokers and their clients — California, Missouri, South Carolina and South Dakota — while 14 have not. He put the remaining 32 states, including Nevada, in a "quasi-fiduciary" category.

"Quasi-fiduciary states impose standards that exceed the suitability standard set forth under Finra rules, but do not expressly classify broker-dealers as fiduciaries," Mr. Finke wrote.

Mr. Gerstein anticipates that more states will tackle investment advice regulation.

"The notion of these high standards of care across all the regulated entities is entering the public consciousness," he said. "It has become much more of a kitchen-table discussion than it used to be."

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