Nevada fiduciary law raises concerns among retirement professionals, brokerage industry

Critics complain that it conflicts with ERISA and SEC rules

Sep 18, 2017 @ 1:27 pm

By Robert Steyer

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A new Nevada law expanding the fiduciary responsibilities of certain financial professionals could have implications well beyond the border of the Silver State, supporters and critics agree — for significantly different reasons.

Enacted in July, the law places fiduciary responsibilities on broker-dealers, registered investment advisers and some financial services sales representatives. Previously, these professionals were excluded from the existing state law covering the fiduciary duties of "financial planners."

The impact on retirement plans, institutional investors and individual investors remains uncertain pending regulations to implement the law amid critics' arguments that it conflicts with the Employee Retirement Income Security Act as well rules set by the Securities and Exchange Commission. The law appears to be the first of its kind at the state level, but that's little comfort to critics.

"It's a concern that this situation proliferates to 50 different states' legislation," said Brian Graff, CEO of the American Retirement Association, Arlington, Va., whose organization opposes the law. "Imagine dealing with 50 different state courts" if plaintiffs sue under expanded state laws.

The ARA is an umbrella group for trade groups representing plan sponsors, actuaries, consultants, administrators, insurance professionals, financial advisers, accountants, attorneys and human resource managers.

Supporters say the new law is a response to President Donald J. Trump's effort to delay, dilute and perhaps demolish the Department of Labor's fiduciary rule developed under former President Barack Obama. They say some state legislatures, alarmed at the status of the fiduciary rule, might follow Nevada's approach.

These financial professionals "should put their clients' needs before their own," state Sen. Aaron Ford said in an interview. He introduced the fiduciary duty legislation on March 20. The bill was signed by Nevada Gov. Brian Sandoval on June 2.

Mr. Ford, the state Senate majority leader, said the legislation reflected his concern that the federal fiduciary rule would be weakened by Mr. Trump. He introduced the bill shortly after the Department of Labor announced an initial delay in implementing the fiduciary rule.

Given the uncertainty of the federal rule, "we have to protect the citizens of Nevada," said Mr. Ford. He added legislators from several other states have contacted him, but he declined to identify them.

"We want everybody giving (financial) information to be giving the best information," said Barry Gold, director of government relations for AARP Nevada, a supporter of the law. "We supported it at the state level and we supported the fiduciary rule at the national level."

ERISA CARVE-OUT SOUGHT

Critics argue that the new law clashes not only with ERISA and SEC rules, but also with standards established by the Financial Industry Regulatory AuthorityInc. and by the Federal Arbitration Act.

Mr. Graff of the ARA said the Nevada law runs afoul of a section in ERISA that says the federal statute pre-empts state law on retirement plan management.

"We are hoping for a carve-out of ERISA plans," Mr. Graff said. His comments were based on an analysis by Trucker Huss, a San Francisco-based ERISA and employee benefits law firm, commissioned by Mr. Graff's association.

"We believe the courts would find that Nevada law, as amended by the statute, would be pre-empted by ERISA to the extent that it relates to the services provided by a 'financial planner' to an employee benefit plan subject to ERISA," said the Aug. 21 analysis. Such a pre-emption would affect plan fiduciaries and/or the plan's participants or beneficiaries, the law firm wrote.

Nevada law says "financial planners" have a fiduciary duty to clients. It describes a financial planner as someone "who for compensation advises others upon the investment of or upon provision for income to be needed in the future." The law says a financial planner is someone "who holds himself or herself out as qualified to perform" the investment and income functions.

Prior to enactment of the law, Nevada excluded certain professions from fiduciary responsibilities demanded of "financial planners." The law removed the exemption for broker-dealers, investment advisers and certain financial services sales representatives, requiring them to play by the same rules as financial planners.

"This is a common-sense solution if they are doing the same thing even if they don't have the same title," said AARP's Mr. Gold.

Although the law removed exemptions for some professions, exemptions remain for attorneys, certified public accounts, insurance providers and insurance consultants.

The new law is subject to the Nevada Secretary of State's securities division developing regulations. The process, which includes requests for public comments, a workshop discussing proposed rules and public hearings, will extend into early 2018.

Several trade groups have written to the securities division, saying regulations should require the law to defer to federal guidelines covering fiduciary duties and to standards covering professionals' conduct and dispute resolution.

"Our concern is creating consumer confusion and creating an additional fiduciary standard" on top of federal laws and regulations, Kim Chamberlain, managing director and associate general counsel of the Securities Industry and Financial Markets Association, said in an interview. "We fear conflicting legal requirements and compliance challenges."

SIFMA was one of seven trade groups — including the Insured Retirement Institute and the Center for Capital Markets Competitiveness, a unit of the U.S. Chamber of Commerce — that signed a June 23 letter to the state securities division, criticizing the new law. Representatives of the chamber and IRI declined to comment.

SETTING A PRECEDENT?

Ms. Chamberlain added that the Nevada law could encourage other states to pass their own fiduciary standards. "We are concerned about the precedent that it sets.," she said.

Government relations analyst and lobbyist Duane Thompson said he isn't aware of other states expanding fiduciary duties or how many might follow Nevada's lead.

"It's difficult to determine, but I doubt red states would do this," said Mr. Thompson, president of Potomac Strategies, Kensington, Md., who describes his firm as non-partisan and who isn't involved in the Nevada law debate. (The Nevada bill was approved by the Democratic-controlled Assembly and Senate but signed by a Republican governor.)

If Nevada does trigger action by other states, it wouldn't be the first time states acted in what legislators perceive is a shortcoming of federal protection for consumers, Mr. Thompson said. One example, he noted, is the effort by a number of states to create state-run private-sector retirement programs for employees whose firms don't provide retirement coverage.

Robert Steyer is a reporter with IN sister publication Pensions&Investments.

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