The comment period closed March 1 on Nevada’s proposed fiduciary standard rule, some submitted comments that must have raised eyebrows at the State’s Securities Division. As most SER members know, the SEC is moving ahead with a uniform fiduciary standard rule, as authorized by Dodd-Frank section 913(g)(1). Specifically, the SEC published in May 2018 three proposals: Regulation Best Interests; Standard of Conduct for Investment Advisers; and Form CRS Relationship Summary and Form ADV. These proposed SEC Rules are designed to supplant state definitions of fiduciary duties with a uniform federal standard for broker-dealers and investment advisers. Federal Register Publication triggered a 90-day public comment period that expired August 7, 2018. The SEC received over 6,000 comments (3,000 of which were unique) on Reg-BI and related materials. This activity by the Commission has not discouraged some States from developing their own fiduciary standard, including some controversial rulemaking by the Silver State.
Nevada Statute Enacted
Nevada passed fiduciary legislation back in 2017, enacting Senate Bill 383 (Jun. 21), a new law establishing a fiduciary standard for brokers and investment advisers operating in the State. The old law had a fiduciary duty for “financial planners,” but specifically excluded from that term “a broker-dealer, sales representative, investment adviser or representative of an investment adviser.” The new law amended NRS § 628A.010 to eliminate that exclusion, but maintained the exclusion for attorneys, CPAs, and certain insurance producers. The Bill authorized the Securities Division to “adopt regulations concerning such fiduciary duty; providing penalties; and providing other matters properly relating thereto.”
The Nevada Securities Division reacted to the Legislature's invitation at the start of 2019. On January 18th it published draft regulations and a request for public comments by March 1st. Although the comment letters are not published on the Division’s Website, Nevada will provide copies upon request to firstname.lastname@example.org. Described below are some noteworthy comments that have been made public:
PIABA: The March 21 letter states: “PIABA has long advocated for a true fiduciary standard for brokers who provide investment advice to their clients and therefore fully supports the implementation of the Draft Regulations, with minor modifications, suggested below. Consistent with numerous studies, including the Securities and Exchange Commission’s findings in 2011, we believe that a uniform fiduciary duty applicable to all financial intermediaries who provide investment advice would eliminate confusion and best protect investors. We also believe that the fiduciary duty should: 1) arise whenever a financial or investment recommendation is made, 2) apply to all forms of financial advice, and to all customers; and 3) last throughout the duration of the advisor-customer relationship. The Division’s proposed Draft Regulations provide many of these protections” (footnote omitted). Among the suggested improvements is including in the Rule a definition of “fiduciary duty.”
Joint Securities Industry Letter: Thirteen national and Nevada industry trade associations (ed: listed in our editorial note below) submitted a joint comment letter dated March 1st. The group cites ten problems with the proposed regulations (ed: listed verbatim): 1) The SEC is Close to Finalizing Its Own Regulation Best Interest Standard; 2) The Draft Regs Continue to Raise Pre-Emption [sic] and Other Legal Concerns; 3) The Draft Regulations Would Likely Accelerate the Move from Brokerage to Fee-Based Accounts; 4) Institutional Investors and Sophisticated Governmental Entities Should Be Expressly Excluded; 5) Annuities Are Properly Excluded from the Regulation; 6) The Regulations Should Limit the Law’s Scope to Customers with Nevada Domiciles; 7) The Regulations Should Not Impose an Ongoing Fiduciary Duty on Broker-Dealers and Their Agents; 8) The Exemptions to the Fiduciary Duty Standard Are Too Narrow; 9) The Breach of Fiduciary Duty List is Overly Broad; and 10) Final Regulations Should Include a Reasonable Implementation Period and Effective Date.
SIFMA: Although the organization signed the joint industry letter, it also submitted its own letter dated March 1. The heavily footnoted 27-page letter expands on the joint industry letter, stressing that the states should wait for the SEC to act on its rule: “A state-by-state approach also runs a significant risk of imposing regulations that are sufficiently costly, burdensome and/or difficult if not impossible to operationalize such that firms would be strongly incentivized to: (i) migrate brokerage accounts to fee-based accounts (Though such moves may be appropriate, they may ultimately be more costly for certain investors.); (ii) scale back brokerage services to execution only (i.e., do not provide brokerage advice); (iii) raise prices to cover their higher costs; and/or (iv) discontinue service to BD accounts altogether.”
Morgan Stanley: Morgan Stanley's letter drew headlines because it threatened to cease doing a brokerage business in the State, if the proposed rules were adopted. A copy of that comment letter, obtained from the Nevada Securities Division, confirms the media reports. Says the letter: "[W]e believe the Proposal unnecessarily expands the fiduciary duty described in Nevada Revised Statute ('NRS') Section 628A and that the 'episodic' and 'unsolicited transaction' exemptions in their current form are far too narrow for firms to continue to offer Nevada investors cost effective brokerage options. Absent substantial changes to the proposal, Morgan Stanley will be unable to provide brokerage services to the residents of Nevada." The letter also suggests several fixes.
(ed: *The joint industry letter was signed (in this order) by: SIFMA; American Council of Life Insurers; Alternative and Direct Investment Securities Association; Financial Services Institute, Inc.; Institute for Portfolio Alternatives; Insured Retirement Institute; Money Management Institute; National Association of Insurance and Financial Advisors; NAIFA-Nevada; Nevada Bankers Association; Small Business Investor Alliance; Center for Capital Markets; and U.S. Chamber of Commerce. **Morgan Stanley’s approach reminds us of the NASD/NYSE – California feud over the State’s Arbitration Ethics Standards. Before it prevailed in the courts, NASD in July 2002 temporarily stopped conducting arbitration hearings in California.)