8 highlights of Nevada’s fiduciary proposal

The state's fiduciary proposal includes a private right of action, is more expansive than industry expected.

The proposal, which is open for comment until March 1, is more expansive than industry observers were expecting, said Fred Reish, chair of Drinker, Biddle & Reath’s ERISA and retirement income team. (Photo: Shutterstock)

Securities brokers and insurance agents who felt most threatened by the Department of Labor’s fiduciary rule — and most relieved when it was vacated in the Fifth Circuit Court of Appeals last year — are again finding themselves looking over their shoulder, at least in the state of Nevada.

In 2017, Brian Sandoval, Nevada’s then Republican governor and a former federal judge, signed a law passed by the state’s Democratic legislature requiring a fiduciary standard for brokers.

The proposed parameters of the new rule were released January 18, more than a year and a half after the law was passed.

The proposal, which is open for comment until March 1, is more expansive than industry observers were expecting, said Fred Reish, chair of Drinker, Biddle & Reath’s ERISA and retirement income team.

Like Labor’s vacated fiduciary rule, Nevada’s proposal includes a new private right of action, allowing investors to sue for allegations of fiduciary breach.

The Securities and Exchange Commission’s proposed Regulation Best Interest, which is designed to raise brokers’ existing suitability standard for investment recommendations to retail investors, does not include a private right of action. Under that rule, the SEC and FINRA would enforce breaches.

“That single thing will make the Nevada rule much more impactful than Reg BI,” said Reish in a recent webinar.

Nevada hosts 174 FINRA-registered firms with 1,278 branches.

The state’s proposal applies a broad definition of investment advice, and offers only narrow exemptions for activities that would fall outside the realm of fiduciary advice, attorneys with Drinker Biddle said.

Dually registered brokers are treated as RIAs under the rule, and cannot avail themselves of exemptions, another major way Nevada is deviating from the SEC’s Reg BI.

“This is the opening salvo in what is going to be a much broader war,” said Brad Campbell, a partner at Drinker Biddle and former head of Labor’s Employee Benefits Security Administration in the Bush Administration.

New Jersey is prepping a proposed fiduciary rule; New York has issued regulations for sales of annuities. A number of states are considering following suit, said Campbell, who, along with others in industry, fears the “Balkanization” of securities regulations, whereby practitioners will be subject to a patchwork of different standards across state lines.

From his experience having overseen the drafting of regulations at the federal level, Campbell suggested Nevada’s proposal, produced by the Securities Division of Nevada’s Secretary of State, leaves plenty to be desired.

“I am not impressed with the quality of the drafting in this proposal,” he said matter-of-factly. “It doesn’t look like the product of 14 months of deep thought.”

Here a few highlights of the proposal:

1.  These broker-dealer or sales rep activities would constitute fiduciary advice under the following time periods:

2. No dual-registrant backdoor:

“Any investment adviser who also acts as a broker-dealer, whether through the same entity or related entity, and any representative of an investment adviser who also acts as a sales representative, is presumed to be acting in their capacity as an investment adviser or representative of an investment adviser.”

Dually registered brokers will not be able to rely on the proposed rule’s exemption for the ongoing monitoring of investments.

3.  Investment advice includes, but is not limited, to the following:

4. What is not fiduciary investment advice:

5. Exemptions to fiduciary standard:

6. Episodic Fiduciary Duty Exemption:

Under the exemption, a broker-dealer has a fiduciary duty related to specific advice given to a client, but does not have an ongoing duty to monitor the investment if:

7. No escape hatch via titling:

A broker-dealer holding themselves out under the following titles does not limit their fiduciary duty and cannot rely on the Episodic Fiduciary Duty Exemption:

8. Propriety products:

Sales of propriety products do not in and of themselves constitute a fiduciary breach, so long as the client is advised that the product is proprietary and on all of the risks associated with the product.

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