The proposed fiduciary regulation issued by Nevada on Friday is sending shockwaves through the broker-dealer and registered investment advisor communities, according to ERISA attorneys Fred Reish and Brad Campbell of Drinker Biddle & Reath.
The Nevada proposal has “really surprised the regulated community,” particularly broker-dealers, said Reish, a partner and head of Drinker Biddle’s ERISA Financial Services Group, on the law firm’s Inside the Beltway webcast on Thursday.
“I think it’s fair to say [the Nevada plan] is a much more expansive and broad rule than most observers were expecting,” added Campbell, the former head of the Labor Department’s Employee Benefits Security Administration, who’s a Drinker Biddle partner located in Washington.
After a quick read of Nevada’s plan, Reish added, the “biggest difference” he sees between the Nevada proposal and the Securities and Exchange Commission’s proposed Regulation Best Interest is that Nevada’s proposal includes a “private right of action.”
In other words, said Reish, “investors can sue for losses.” Under Reg BI, however, “if the broker-dealer or advisor violates the best-interest standard of care, assuming the rule becomes final as written, there is no private right of action — only the SEC and [the Financial Industry Regulatory Authority] could enforce that, and they have limited resources.”
The private right of action “will make the Nevada rule, in its limited geographical area, much more impactful than Reg BI,” Reish added.
While Nevada’s legislature passed its own fiduciary statute for securities in 2017, the law couldn’t be implemented until regulations were put into place. Nevada issued those proposed regs on Jan. 18, with a comment period that expires on March 1.
“Even though Nevada passed this law in 2017 and we spent all of 2018 waiting for this proposed regulation to come out, I have to say I’m not impressed with the quality of the drafting,” Campbell stated. “It doesn’t look like the product of 14 months of deep thought about how to proceed.”
That being said, Campbell noted on the webcast that Nevada’s plan “really does establish a fiduciary standard pretty much for broker-dealer interactions as well as RIAs.”
Among some of the provisions that are in the proposal, for example: “If you are dually registered as a broker-dealer or RIA, you cannot take advantage of any of the exemptions that it provides for broker-dealers,” Campbell said. “You are treated as an RIA for the purposes of the rule.”
In terms of some of the potential exemptions, “they’re pretty narrow,” he continued.
For instance, “you would be a fiduciary whether you’re a broker-dealer or RIA if you provided investment advice — and the definition of investment advice is extremely broad — it doesn’t include making recommendations. But one of the things that is investment advice is providing analysis or reports to a security to a client,” Campbell explained.
“Note that that’s not a recommendation, that’s an analysis or a report, by presumably by a third party or yourself [an advisor or broker], which would then, by itself, be considered investment advice.”
The Nevada plan also prohibits certain uses of titles when using what the plan calls “the episodic fiduciary duty,” Campbell stated. For example, “you could not call yourself an advisor —with an o or an e — a financial planner, a financial consultant, a retirement consultant, a retirement planner, a wealth manager or counselor or other titles” that the securities administrator may deem not in order.
After a quick review, the Nevada plan “does allow you to make a recommendation of a proprietary product and it does seem to allow for commissions and markups and markdown” commissions. “It doesn’t appear to inherently change the compensation arrangements although it does have a disclosure section.”
Campbell said that he sees the Nevada plan along with New York’s finalized best-interest standards for life insurance and annuities as “opening salvos in what will be a much broader war, which is various states jumping forward with their own fiduciary or best interest standard applicable to securities or insurance transactions.”
New Jersey will be next, Campbell said, as it’s going to issue a proposed regulation establishing a fiduciary standard shortly.
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