Nevada fiduciary proposal packs punch with broad scope of coverage

Fiduciary advocates give it high marks for capturing the full range of conduct that should be subject to a fiduciary standard

Jan 23, 2019 @ 5:09 pm

By Mark Schoeff Jr.

A proposed regulation to raise advice standards in Nevada for stock brokers and financial advisers is receiving high marks from fiduciary advocates.

Last week, the Nevada Securities Division released the eight-page regulation proposal to implement a law enacted in 2017 that requires brokers to meet a fiduciary duty when working with their clients. The Nevada rule is expansive in defining financial advice as well as the circumstances in which brokers would commit fiduciary breaches.

The state is moving ahead with the measure while the Securities and Exchange Commission continues to work on its advice reform proposal — a three-part package that would continue to regulate investment advisers as fiduciaries while requiring brokers to act in the best interests of their clients.

A comment period on the Nevada proposal will end March 1. After that, the state regulatory could modify the rule. It's unclear when a final regulation will be released.

"The Nevada fiduciary proposal is stronger and more elegant than the SEC proposal," said Benjamin Edwards, an associate law professor at the University of Nevada-Las Vegas. "It does in eight pages what the SEC needed a thousand pages to do less effectively."

The breadth of the Nevada proposal, which also touches on investment advisers, jumped out to Skip Schweiss, managing director of adviser advocacy at TD Ameritrade Institutional.

"This covers the landscape," Mr. Schweiss said. "There's no getting around being a fiduciary if you're providing advice as a broker or an adviser."

Under the Nevada proposal, brokers must provide an ongoing fiduciary duty to clients if they manage the client's assets or create periodic financial plans, among other factors. Outside of those circumstances, the fiduciary requirement can be transaction-by-transaction.

The Nevada proposal assumes a broker who is dually registered as an adviser acts as an adviser for clients throughout the relationship and must always meet the fiduciary standard. The fiduciary requirement would apply to brokers across several kinds of job titles and to those who "hold themselves out" as advisers.

"One of the strengths of the regulation is the broad scope of its coverage," said Barbara Roper, director of investor protection at the Consumer Federation of America. "It does a good job of capturing the whole range of broker-dealer conduct that should be subject to a fiduciary standard."

But the expansiveness of the Nevada proposal is a drawback for Lawrence Stadulis, a partner at Stradley Ronon Stevens & Young.

"The regulations were certainly more extensive than we had anticipated," Mr. Stadulis said. "The most surprising aspect was the number of activities that are deemed a breach of fiduciary duty. There are a lot of kinks in the proposed regulation that need to be worked out."

Ms. Roper also said some improvements are needed. A benefit of the SEC proposal is that it would require mitigation of conflicts of interest, although the SEC hasn't outlined how they should be mitigated. The Nevada proposal doesn't touch on mitigation.

"We'd like to see them do more to ensure that conflicts of interest do not inappropriately influence recommendations," she said.

Brian Graff, chief executive of the American Retirement Association, is concerned that the Nevada proposal does not provide an exemption for advice to retirement plans and plan assets governed by federal retirement law. He argues that retirement plan advisers in the state should only have to answer to the federal government.

"Frankly, [the Nevada regulation] is likely to go to litigation if advice with respect to covered plans is not carved out," Mr. Graff said.

Critics of the proposal also are likely to argue in comment letters that the SEC rule should trump state investment advice regulations.

But Mr. Edwards said Nevada is on solid ground.

"It's well within state authority to regulate conduct and protect its citizens from financial fraud," he said.

Other states have introduced investment advice legislation — and New Jersey is considering its own fiduciary regulation.

"We're not done here," Mr. Graff said in reference to state activity.


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