Broker-dealers and advisors doing business in Nevada will need to pay attention to newly proposed regulations defining the state’s new fiduciary standard – especially since there does not appear to be an ERISA exemption.
Nevada’s Office of the Secretary of State, Securities Division, released draft regulations on Jan. 18 based on legislation enacted by the state’s legislature in 2017 – the first of several states to do so.
The lack of an ERISA exemption could be problematic not only for advisors, but for the Nevada statute generally, according to a comment letter filed in 2017 by the American Retirement Association, the parent organization of NAPA. That letter included a legal analysis conducted by the law firm of Trucker Huss that concludes that courts would find that the Nevada statute is 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.
That legislation revised the Nevada Securities Act to mandate that any “broker-dealer, sales representative, investment adviser or representative of an investment adviser shall not violate the fiduciary duty toward a client” imposed by another statute, NRS 628A.010, which imposes the “duty of a fiduciary” on all financial planners. However, the legislation also modified the definition of “financial planner” to remove what had been an exclusion from that category for broker-dealers and their representatives and investment advisers and their representatives.
The 2017 legislation also gave the Nevada securities administrator authority to further define the fiduciary duty by defining certain acts as violations or exclusions from the duty and prescribing “means reasonably designed to prevent” violations of acts defined as a violation of the duty.
In general, the draft regulations state that the obligations to a client imposed by the fiduciary duty includes the time period for which the investment adviser or representative of an investment adviser:
- provides investment advice;
- performs discretionary trading;
- maintain assets under management;
- acts in a fiduciary capacity towards the client;
- discloses fees or gains;
- through the completion of any contract; and
- through the term of engagement of services.
The ARA previously met with the Nevada regulators and in the aforementioned comment letter made the case that there are strong legal and policy arguments for exempting investment advisory services to ERISA-covered retirement plans and their participants and beneficiaries from the regulations – and that it was the intent of Congress in enacting ERISA to provide a uniform set of national rules and causes of action that should be respected by Nevada in promulgating regulations.
To that end, the letter argued that any Nevada regulation of fiduciary advisory services to employer-sponsored retirement plans and their participants and beneficiaries would not only be preempted by ERISA, but that even if the “savings clause” in ERISA’s preemption provision were somehow interpreted to cover the Nevada regulation of these activities, it would still require the matter to be referred to federal court.
Meanwhile, the draft regulations do provide for an “episodic fiduciary duty exemption,” such that the duty owed to the client under the exemption ends once the advice is received by the client, the transaction is complete and the required fee and gain disclosures have been made.
The exemption would continue to apply only if certain other requirements are met, including that the broker-dealer or sales representative does not provide ongoing investment advice, perform discretionary trading for the client or otherwise developed a fiduciary relationship with the client from previous or concurrent services.
What’s more, the sale of proprietary products by a broker-dealer or sales representative alone would not be a breach of fiduciary duty per se, as long as they met certain conditions, including that they advised the client that the product is proprietary and advised them of all the risks associated with the product.
Similarly, a broker-dealer, sales representative, investment adviser or representative of an investment adviser who holds or manages a client’s position in cash would not breach their fiduciary duty based on that cash position alone, as long as they advised the client of all risks associated with the cash position and complied with all other applicable regulations.
The proposal further explains that transaction-based commissions for sales also would not be a breach of fiduciary duty, provided that it’s in the client’s “best interest to be charged by transaction as opposed to other types of fees and the commission is reasonable.”
The office is requesting written comments on the proposed rule by March 1, 2019; the ARA will be weighing in.