Nevada Law Requires Fiduciary Standards For Brokers

• Posted on: Jun 30 2017

As noted in a prior Blog post (here), the Labor Department’s fiduciary rule, at least the first phase of the rule, has gone into effect, though its future remains uncertain. On June 9, 2017, two provisions of the rule, which requires financial advisers and other investment professionals to act in the best interest of their clients and to disclose any potential conflicts of interest when providing retirement advice, became effective. One expands the definition of who is a fiduciary, and the other establishes impartial conduct standards.

While the future of the Rule is shrouded in uncertainty, state regulators are taking matters into their own hands. In Nevada, for example, under a law that takes effect on July 1, 2017, brokers, sales representatives, investment advisers or their representatives will be required to meet a fiduciary standard when providing investment advice.

The existing fiduciary law only applies to financial planners; brokers, sales representatives, investment advisers or their representatives are excluded from that requirement. Prior to the new law, brokers operated under the suitability standards enforced by the Financial Industry Regulatory Authority Inc. (“FINRA”), which requires them to sell products that meet a client’s risk tolerance, liquidity needs, and investment objectives. By contrast, investment advisors, are required to satisfy the requirements of the Investment Advisers Act of 1940, which provides that investment advisers must give advice that is in a client’s best interests — that is, meet a fiduciary standard. 

Under Nevada’s current fiduciary duty law, a financial planner must disclose any “profit or commission” they receive based on their guidance to clients and must make a “diligent inquiry” about a client’s financial condition and goals. A financial planner is defined as “a person who for compensation advises others upon the investment of money or upon provision for income to be needed in the future, or who holds himself or herself out as qualified to perform either of these functions.” The new law does not disturb the exclusions from the definition of financial planner for attorneys, CPAs, and insurance producers.  

Under the new law, Nevada’s securities administrator is authorized to adopt regulations that define violations of the fiduciary duty and prescribe any “means reasonably designed to prevent” violations of acts defined as a violation of the duty.  Any rulemaking under this authority will apply only to brokers and their representatives, and investment advisers and their representatives.  It does not apply to any other financial planners. 

Investors can sue financial planners for “the economic loss and all costs of litigation and attorney’s fees” that result from following a financial planner’s advice where the financial planner violated the fiduciary duty, was “grossly negligent” in offering the financial advice, or otherwise violated Nevada law in “recommending the investment or service.”

One issue left unaddressed by the new law is whether brokers are subject to a continuing duty of care or whether their fiduciary duty is limited to the point of sale.

Some observers believe the law could be challenged under federal preemption. If brokers are not required to register as fiduciaries at the federal level, Nevada may not have the authority to impose a fiduciary standard on them.

Nonetheless, more states may be moving in the direction of a fiduciary standard. Other states, such as New York and California, are considering fiduciary statutes of their own. Additionally, courts in California, Missouri, South Carolina and South Dakota have recognized a fiduciary relationship between brokers and their clients, and a number of states impose standards that exceed FINRA rules.

Takeaway

The fate of the DOL’s fiduciary rule looms large. If Congress legislates the Rule out of existence, or the DOL makes changes to, or delays implementation of, the remainder of the Rule, other states may follow Nevada’s lead. Given the uncertainty of the Rule’s continued implementation, and questions about whether the Securities and Exchange Commission will step into the fray, it is more likely the states will fill the void.  From the investors’ perspective, especially retirees, such action would be welcome.