The Silver State managed to overlook the long history of ERISA preemption in its recent draft fiduciary regulations. Once again, the American Retirement Association has brought this to their attention.
The comments came in response to draft regulations issue in mid-January by Nevada’s Office of the Secretary of State, Securities Division based on legislation enacted by the state’s legislature in 2017 – the first of several states to do so.
On Feb. 28, the ARA answered the Nevada Securities Division’s call for comments on a proposed regulation that would fundamentally change the legal obligations of broker-dealers and investment advisers doing business in Nevada by imposing a fiduciary duty on them. This marks the third time Nevada officials are hearing ARA’s voice regarding Nevada’s fiduciary law. The comment letter echoes ARA’s previous comments and testimony before the Nevada Secretary of State on the underlying legislation.
For many years, Nevada law imposed a fiduciary duty on financial planners – anyone who provides investment advice for a fee – but spared broker-dealers, sales representatives and investment advisers. In 2017, Nevada legislators expanded the definition of “financial planner” to expressly include these professionals, subjecting them to a fiduciary duty toward clients. The enacting legislation permits the Nevada Securities Administrator to adopt regulations concerning these rules, clarifying what acts, practices and courses of business are and are not breaches of that new duty.
ARA Comment Letter
In response to the request for comments, the ARA's Feb. 28 comment letter reiterates ARA’s long-held belief that financial professionals who provide investment advice should be held to a fiduciary standard that requires their recommendations be in the best interests of their clients. But having that standard be a function of state law is problematic for ERISA plans and their service providers, the letter explains, due to the potential for conflicting fiduciary standards between state law standards and the fiduciary standards already in effect under ERISA. After outlining the concept of ERISA preemption, the letter explains that without exemption of ERISA-covered plans, duplicative regulation, investor confusion, legal conflicts and compliance challenges will result without additional protections for investors. The inevitable compliance and legal costs which result will mean higher costs for consumers.
In the letter, ARA makes recommendations on how the proposed rule could be modified to maintain its intent to increase consumer protections for IRAs and other investor accounts while avoiding conflict with ERISA. Significantly, ARA is not advocating to decrease any protections for consumers. Rather, the exclusion requested in our comments applies only to advice which is currently subject to ERISA’s fiduciary standards.
The comment letter is supported by a legal analysis by the law firm of Trucker Huss that concludes that the Nevada law and proposed regulations are preempted by ERISA to the extent it seeks to regulate financial advisers who provide services to a retirement plan governed by ERISA, to the plan’s fiduciaries and/or to the plan’s participants or beneficiaries.
As ERISA took shape in Congress, the desire for uniform fiduciary principles applicable to plans in every state – with broad preemptive power over state law – was a constant. In the more than 40 years since ERISA’s passage, its principles have dominated the shaping of the industry. Thus, it’s confounding that notwithstanding, some states are overlooking ERISA in approaching what they see as a gap in investor protection.
Allison Wielobob is the American Retirement Association’s General Counsel.