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Would Fiduciary Fears Cause Brokerages to Bail on Nevada?

Fiduciary Rules and Practices

Nevada may be gambling with access to brokerage services for residents, based on the reactions of a number of brokerages to the Silver State’s proposed fiduciary regulation.

According to published reports, Morgan Stanley says it would halt its brokerage services in Nevada entirely if the state adopts a rule raising professional standards for stockbrokers. Similarly, Law360 reports that Charles Schwab, Edward Jones, TD Ameritrade and Wells Fargo have cautioned about pullbacks in investment options if the regulation stands in its current form.

ERISA Preemption

In late February, the American Retirement Association commented on the proposal – reminding the state regulators that in its current form, the regulation would likely face a legal challenge, due to the potential for conflicting fiduciary standards between state law standards and the fiduciary standards already in effect under ERISA. 

The American Retirement Association – and the National Association of Plan Advisors – have long supported the 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.

Brokerage Barriers

The brokerage concerns are different matters, of course. 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. However, 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. 

According to Law360, the brokerage firms asked Nevada securities officials to at least wait to see the SEC’s final Regulation BI before acting. Alternatively, if Nevada decides to go forward with its own regulation, they asked Nevada to exempt all companies dually registered as broker-dealers and investment advisers, according to the report. 

Charles Schwab, Edward Jones, TD Ameritrade and Wells Fargo said the regulation would limit access to professional investment information and options in Nevada. Charles Schwab, for instance, cited “dramatic changes” it will be forced to make, according to Law360. Wells Fargo said the proposal would “effectively eliminate the ability of Nevadans to receive competitively priced brokerage services from dually registered investment firms,” according to the report, which was drawn from 55 comment letters to the proposal provided in response to a public records request.

SIFMA Statement

Those claims mirror those of the Securities Industry and Financial Markets Association (SIFMA), which cautions of “unintended negative consequences” likely under the proposal as currently drafted, commenting that “many Nevada investors would likely suffer the loss of access to brokerage accounts and equally important, the loss of access to advice from BDs. The ability to receive advice incidental to brokerage services as permitted by SEC rules is often more appropriate for, among others, smaller investors, for whom a brokerage account is usually more economical, as well as investors who generally buy and hold and do not need or want to trade frequently, or who do not want to pay for ongoing advice and monitoring through an advisory account. In addition, many of these same investors, particularly smaller investors, would not qualify for fee-based accounts, and so would lose access to advice altogether.”

On the other hand, the North American Securities Administrators Association commented (beyond the March 1 deadline for comments, based on the date of their comment letter), that they “expect that members of the financial services industry and their associations will submit comment letters urging the Division to make further revisions to the Draft Regulations, pointing to various federal laws and/or SEC pronouncements including the National Securities Markets Improvement Act of 1996 (“NSMIA”). However, a reading by the industry of broad preemption in the federal securities laws of state authority is simply an overreach.”

In its comment letter, the 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 the comments applies only to advice which is currently subject to ERISA’s fiduciary standards.

Should make for an interesting NAPA 401(k) Summit topic ( …