Adviser trade associations, investor advocates split on Nevada's authority to implement fiduciary rule

SIFMA, FSI and Investment Adviser Association say hands off; 16 advocacy groups say bring it on

Mar 1, 2019 @ 4:33 pm

By Mark Schoeff Jr.

Financial industry and investment adviser trade associations and investor advocates split Friday on whether Nevada can implement its own investment advice standard.

In comment letters filed on Nevada's proposal to strengthen advice rules, the Securities Industry and Financial Markets Association, the Financial Services Institute and the Investment Adviser Association told the state to back off. They argued that a state-level advice standard would conflict with federal securities laws.

But 16 investor advocacy groups said Nevada has the authority to promulgate the regulation, which would require financial professionals in the state to act as fiduciaries.

The Investment Adviser Association said state regulation of advisers who are registered with the Securities and Exchange Commission violates a 1996 law, the National Securities Markets Improvement Act.

"We urge the [Nevada] Securities Division to amend the draft regulations … to clarify that they do not and are not intended to apply to SEC advisers or their representatives," wrote Gail Bernstein, IAA general counsel. "Failure to do so would contravene the broad preemption provided under NSMIA."

SIFMA cited that law as well as seven others it said would trump a Nevada fiduciary rule.

"The foregoing preemption and other legal infirmities render the proposed regulations as drafted invalid and ultimately unenforceable," wrote SIFMA managing director and associate general counsel Kevin Carroll.

FSI asserted that Nevada can't enact a regulation that would add new broker books and records rules to those contained in federal law.

"The proposed regulation would likely require broker-dealers to create and maintain new records to demonstrate compliance with the proposed regulation," wrote FSI executive vice president and general counsel David Bellaire.

But investor advocates, including the Consumer Federation of America and the Committee for the Fiduciary Standard, praised Nevada's proposed rule, saying it is tougher than the SEC's advice proposal, the centerpiece of which is the so-called Regulation Best Interest broker standard.

"[W]e greatly appreciate states such as Nevada that are willing to step in to fill the regulatory void by providing the protections investors need and expect," the groups wrote. "Contrary to arguments from industry groups, Nevada is well within its authority in proposing this rule. Nothing in the proposal imposes an affirmative obligation on broker-dealers to keep new or additional records"

In addition to Nevada, New Jersey is working on its own fiduciary rule and the Maryland legislature is considering legislation that would require financial advisers in the state to be fiduciaries.

The SEC could release a final advice reform rule by early summer. SIFMA said the SEC should promulgate a "uniform, nationwide" standard of conduct for brokers.

"A state-by-state approach would result in an uneven patchwork of laws that would be duplicative of, different than and/or in conflict with federal standards," Mr. Carroll wrote.

But the investor advocacy groups assert that the SEC's Regulation Best Interest is weaker than the current suitability standard governing brokers. Under its proposal, the SEC would continue to hold investment advisers to a fiduciary standard.

The Nevada proposal "provides a model for how to extend a fiduciary standard to the broad array of services that investors reasonably rely on as fiduciary investment advice," the advocacy organizations wrote. "As such, it helps to ensure that Nevada investors will receive uniform protections regardless of whether they rely on a broker-dealer or investment adviser for investment advice."

It's not clear how long Nevada will take to review the comment letters or when it will promulgate a final rule.

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