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.

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."

0
Comments

What do you think?

View comments

Upcoming event

Oct 22

Conference

San Francisco Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Most watched

Events

Finding your edge from Tony Robbins

Guru Tony Robbins has helped a lot of people, but armed with his psychology Financial Advisor Josh Nelson has helped his practice soar.

Events

Finding innovation in your firm

Adam Holt of AssetMap explains how advisers understand they need to grow, but great innovation may be lurking right under your nose.

Latest news & opinion

How to battle sequence-of-returns risk

Retiring during the longest-running bull market in history can be scary, as some begin to wonder when the good times will end.

Tony Robbins loses role with RIA amid charges of sexual misconduct

String of allegations costs the self-help guru his gig as chief of investor psychology at Creative Planning.

SEC sets June 5 date for vote on Regulation Best Interest

Commission adds new item to agenda: Interpretation of broker guidance that qualifies as advice

House passes SECURE retirement bill with massive bipartisan support

The measure allows small employers to band together to offer plans and raises the RMD age. Another provision eases use of annuities in 401(k)s, which critics say goes too far

10 IBDs with the most annuity revenue

Here are the independent broker-dealers that brought in the most annuity revenue last year.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print